Tax Reform: Considerations for Donors and Nonprofits

Most taxpayers will be impacted by the passage into law of the Tax Cut and Jobs Act. Nonprofit organizations, and the people who support us, are still trying to understand the ramifications.

The standard deduction was increased for both single (from $6,350 to $12,000) and married joint (from $12,700 to $24,000) filers. In addition, the charitable deduction was increased to 60 percent of adjusted gross income. With these things in place, the number of people itemizing will be less than before. What is being surmised is that as fewer people itemize, there will be a dampening effect on charitable giving.

Until now, 30 percent of taxpayers were able to itemize, and moving forward, the expectation is that will drop to less than 10 percent.¹ Small donations from people who used to itemize may be impacted the most. If unable to use the charitable deduction to reduce their taxes, the charitable giving of this group may drop. Some researchers² anticipate annual giving will drop anywhere from $13 billion to $20 billion.

The hope of all of us is that donors give because they want to improve community rather than just for the tax deduction, but it is clear that both factors are at play.

For consideration:

1. Those who continue to itemize and who have stock portfolios should take advantage of the benefits of giving appreciated stock, because their deduction can be for the full current market value (there are some limitations, so check with your tax advisor), while avoiding the issue of paying capital gains tax.
2. Being 70 ½ years young can be an advantage: Donate IRA assets (up to $100,000) and satisfy the required annual distribution—removing the gift amount from your taxable income. These assets can also be used to establish a charitable fund at the Community Foundation.
3. Donors may begin “bunching” their giving: If several years of contributions are made in one tax year, then donors can itemize in that year, and take the standard deduction in the next. This strategy can help donors, but makes nonprofits uneasy; they need predictable annual revenue. A donor-advised fund at the Community Foundation can provide for “bunching” and at the same time, donors may recommend regular, annual grants to their favorite nonprofits, helping to stabilize their revenues.
4. The corporate tax is decreasing from 35 percent to 21 percent with the new tax law, which could result in increased corporate giving. Corporations can also utilize Community Foundation services to create charitable funds with these dollars to provide for giving aligned with the values of the corporation.
   

¹The Charles Schwab Corporation
²The Independent Sector, the Lilly Family School of Philanthropy, and the Tax Policy Center