Because of the enactment of last year’s Tax Cuts and Jobs Act, fewer taxpayers will use itemized deductions on future tax returns. Although this could mean a reduction in charitable giving, your nonprofit may have options for mitigating any potential revenue loss from the new tax law.
According to the Joint Committee on Taxation, the new law will cause the number of filers who itemize to drop from approximately 30 percent to 13 percent. Because fewer taxpayers will itemize, fewer people will be able to deduct their charitable donations. It is estimated that this could reduce charitable giving by between 4 percent and 5 percent annually. Another concern is the doubling of the estate tax exemption, perhaps reducing the incentive for some estates to donate assets.
Nonprofits should prepare as soon as possible by adjusting their financial plans to accommodate the tax changes. Despite the reduction in itemizers, consider other tax changes and different revenue-raising strategies you can use to offset the impact.
- Flexibility for high-dollar donors: Much has been made of the increased standard deduction change, but the new law also increased the income cap for annual donations from 50 percent to 60 percent of adjusted gross income. Plus, the law repealed the “Pease” limitation, which limited the value of itemized deductions for higher-income earners. This means that wealthy donors could make larger contributions in a given year. With the new AGI cap, a household with $2 million in income could now donate an annual maximum of $1.2 million, a 20 percent increase from the previous cap. And households that were previously precluded from claiming a charitable deduction because of the Pease rule now have more flexibility to take the deduction for more of their giving.
- Higher after-tax income may increase willingness to donate: A major aim of the new law was to limit the use of deductions to help lower tax rates across the board. Because income tax rates are lower, the dollar value benefit of the charitable deduction is now lower even for taxpayers who continue to itemize. However, higher after-tax income for households presents a new opportunity as well. As taxpayers adjust to the new, lower tax withholdings from their wages, they may have more disposable income that could go toward charitable contributions. By tracking national and regional wage growth patterns, nonprofits can monitor whether a particular donor base has enough income flexibility to overcome the reduced allure of the charitable deduction.
- Reduce reliance on fourth quarter giving: Nonprofits may need to adjust their end-of-year fundraising strategies to maximize revenue. Traditionally, the encroaching end of the calendar year gave nonprofits a chance to remind individuals that they have an opportunity to make a donation to save on their soon-to-be-filed tax returns. Depending on the demographics of the contributor base, it may make sense to instead do a steady stream of advertising throughout the year. Plan to put more time and spending into soliciting donations year-round, rather than planning on a spike in collections during the final quarter related to the advertising of tax benefits.
- Accommodate the use of donation bunching: A number of taxpayers will fall just below the deduction level necessary to itemize. Imagine a household that hits the new $10,000 cap for the state and local tax deduction, has $5,000 in mortgage interest to deduct and donates $5,000 to charity. Under previous law, the $20,000 in potential deductions meant itemizing provided more value than taking the $12,700 standard deduction. Now that the standard deduction for married joint filers is $24,000, that same couple would no longer itemize. But to maximize the tax benefits, that same couple could instead donate $10,000 once every two years. Their average giving would still be $5,000, but combining it into one filing year allows the couple to claim the full value of the deduction.
- Keep up-to-date on other tax changes: Although the new law is in place, the Department of the Treasury is still formulating important rules that could impact charitable giving options for businesses. In some instances, taxpayers may instead have opportunities to make fully deductible donations via their business income instead of their individual income. It’s important to follow these developments closely to know the charitable deduction options available that impact your nonprofits fundraising abilities.
- Lifetime charitable planning: With the new tax law changes organizations should consider informing donors on the benefits of charitable planning including qualified charitable deduction from IRA distributions. Qualified Charitable Deductions or QCDs offer valuable benefits, but it’s important to understand their requirements to avoid costly tax mistakes. Charitable remainder trusts and other bequests are additional giving opportunities which may be a new or improved source of revenue to offset any loss due to the deductability of charitable giving.
The new tax landscape may make charitable giving slightly more challenging in the near-term. But nonprofits can manage these challenges by strategizing with their accounting team to revise their long-term revenue goals and fundraising strategies.
For questions on how you can offset the impact of charitable giving, please contact your MarksNelson professional at 816-743-7700.