The Tax Cuts and Job Act (TCJA) passed in late 2017 was the most significant tax legislation we have seen since 1986 and the impact of tax reform on the nonprofit community is expected to be meaningful. Industry leaders have predicted that charitable giving could be reduced by anywhere from $13 billion to $20 billion annually. That potential reduction is a result of changes both to the personal income tax and the estate tax.
Income Tax Changes
Individuals gifting on an annual basis only receive a tax benefit for their gift if they itemize their deductions. From 2018 through 2025, the deductions that one must have in order to itemize have risen substantially as the standard deduction each taxpayer receives has increased to $12,000 for those filing single and $24,000 for those married couples filing jointly. To further complicate matters, individuals have lost many of the deductions they used to be able to itemize. The four deductions left are charitable contributions, mortgage interest, medical deductions, and state and local taxes (deduction capped at $10,000).
With a higher standard deduction and limited itemized deductions, individuals will have a reduced incentive to make charitable donations.
Estate Tax Changes
Another major change in the new tax legislation was the increase in the estate and gift tax exemption. This is the amount that an individual can give away during their lifetime or at death free and clear of estate and gift taxes. That figure has increased from $5.6 million to $11.2 million for each taxpayer or $22.4 million for those married filing joint.
All of this results in fewer estates subject to taxation. One of the many ways individuals lower their potential estate tax is through bequests at death, and as a result of the higher exemption, there may be a decline in bequests.
Federal Deficit and Potential Spending Cuts
The tax bill also added $1.5 trillion to the Federal deficit. Many are speculating that the increased deficit could increase pressure for spending cuts for entitlement programs, to state and local budgets as well as government grants. This combination means the community would need to increase reliance on nonprofits to fill gaps in the social services the community needs and the nonprofits would have less funds to do so.
What can the Nonprofit Community do?
Work with Donors and their Advisors – Despite the tax changes, there are still strategies that allow donors to receive a tax benefit for their donations. Those strategies include gifting highly appreciated securities, bunching deductions and utilizing a Donor Advised Fund, as well as making Qualified Charitable Distributions (QCD) from their IRA if they are over age 70½. Being aware of these strategies and encouraging donors to work with their Wealth Manager and Tax Preparer can help to continue regular donations.
The 2015 PATH Act made permanent the ability for individuals age 70½ or older to exclude from gross income up to $100,000 annually in IRA distributions that are gifted directly to a qualified charity. Although no charitable income tax deduction is available when making a QCD, the amount distributed is eligible to satisfy one’s RMD requirements without causing the dollars to be taxed.
The increased standard deduction as a result of the TCJA means fewer taxpayers will itemize going forward. Itemizing is the only way that charitable donations become tax deductible. As a result of fewer taxpayers itemizing year to year, donors may want to bunch together their charitable donations into one year and utilize a Donor Advised Fund. Bunching together charitable contributions every other year and taking the standard deduction in the off years allows taxpayers to receive a greater tax benefit from their contributions. Using the Donor Advised Fund allows the donor to continue annual contributions to their nonprofits of choice but receive the tax deduction when they make the “bunched” contribution.
Work with Corporate Partners – As a result of the decreased corporate tax rate, many corporations made large donations to their Foundations in late 2017 when the corporate tax rate was still 35%. This is an opportune time to reconnect with corporate sponsors and make connections with new corporations.
Connect with Donors and Understand Why They Give – More than ever it will become important to understand why donors connect and give to your organization and to strengthen that bond. While the tax incentive is nice, that is not the only reason donors give to your organization and understanding these other reasons will allow you to build a solid case for continued support.
While the overall impact on the nonprofit community is very meaningful, we believe this challenging time also provides the opportunity for nonprofits to increase communication and really get to understand their donors’ situations as best as possible. There are still opportunities for donors to continue supporting their favorite nonprofit organizations as they had in the past, but it requires increased teamwork between the donors, their Tax Preparer and Wealth Manager, and the nonprofits those donors support.
Important disclosure information
Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.
Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.
This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.
RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.