Network for Good has been receiving a lot of questions about the recent Tax Reform Act and what we think the impact will be on nonprofits and the communities we serve. To help us shed some light on the topic, we brought in one of our Personal Fundraising Coaches, John Gilchrist, FAHP, CFRE, and Managing Principal with Philanthropy Focus LLC (dba Fundraiser Strategies), a boutique consulting firm dedicated to the success (fundraising and governance) of nonprofit organizations to weigh in on the topic.
Recent Tax Reform Act
The Tax Cuts and Jobs Act (TCJA) ushered changes in the U.S. Tax Code, effective January 1, 2018. Here are the highlights in the TCJA:
- Increase in the standard deduction to $12,000 for individuals and $24,000 for joint filers.
- Elimination of personal exemptions.
- Limitation on State and Local Taxes (SALT) of $10,000 (inclusive of income and property taxes).
- Reduction in the corporate income tax rate.
- Reduction of five of the seven tax brackets (marginal rates).
What do these changes mean for the nonprofit community and your donors?
The answer is not crystal clear. The short answer is, it depends. However, here are some key points to keep in mind. (These are all examples created for discussion and should not be taken as professional tax advice*):
The standard deduction has increased to $12,000 for individuals and $24,000 for joint filers, so many taxpayers who itemized in 2017 may or may not itemize in 2018 and beyond. Some taxpayers will realize an increase in disposable income, a portion of which could then, in theory, be given to their favorite charity/charities.
INCREASE IN THE CHARITABLE CONTRIBUTIONS DEDUCTION:
The charitable contributions deduction has increased from 50 percent of Adjusted Gross Income (AGI) to 60 percent of AGI. Donors can now claim larger deductions for their gifts of cash in the year the gift is made, but only if their itemized deductions exceed the newly raised standard deduction.
LIMITATION ON STATE AND LOCAL TAXES (SALT):
Beginning in 2018, taxpayers will be given the option to deduct their combined state and local property and income taxes, but only up to a cap of $10,000. The reduction in the SALT deductibility may benefit charitably-minded taxpayers in high-tax states, such as California, New Jersey, and New York. Assuming a taxpayer has reached the $10,000 limit through state income and property taxes, gifts of appreciated stock or property may be more valuable than an outright sale. The reason: many states have a state capital gains tax on the sale of appreciated securities and real estate. For example, if in 2017 a California donor sold stock outright, s/he would pay both federal and state capital gains tax and be able to deduct the state capital gains tax, effectively increasing his/her net profit. In 2018, that same California donor must factor in the $10,000 SALT limitation and likely sees a reduction in his/her net profit. When that donor gives the appreciated stock to charity, capital gains taxes are eliminated.
ELIMINATION OF THE PEASE LIMITATION:
In 2017, high-income donors ($261,500 for individuals and $313,800 for joint filers) saw the value of their charitable deductions reduced by as much as 80 percent due to the Pease Rule. This rule lowered deductions by three percent of the income exceeding the above thresholds. For example, a couple with $800,000 income made gifts totaling $50,000 in 2017. The value of the deduction is reduced by $14,586 ((800,000-313,800) x .03). Due to the Pease limitation, this couple’s $50,000 gift results in a charitable deduction of $35,414. The Tax Cut and Jobs Act repeals the Pease Rule. Combined with the higher AGI deduction percentage, high-income taxpayers receive greater financial benefits for giving.
DONOR ADVISED FUNDS (DAF):
TCJA leaves donor-advised funds untouched. Donors on the bubble of hitting the new standard deduction may employ a strategy known as ‘lumping.’ Donors select a target year to exceed the standard deduction, so it makes sense to itemize. They make a much larger gift in that year with the plan to distribute gifts over several years from their DAF. These giving vehicles have become immensely popular in America. Five of the top 10 largest charities in the U.S. are donor-advised funds (Source: 2017 Philanthropy 400 report).
Confused yet? You are not alone. No one knows with certainty how the Tax Cuts and Jobs Act will play out in the near term. So what can you do? We have a few ideas:
Focus on relationships:
Talk with your donors and stakeholders about how you are meeting your mission, the impact you are having in the community and how their gifts are making transformations happen.
Build value for your nonprofit:
Know your outcomes from the good work that you do and tell your story, repeatedly.
Commit to donor retention:
People give to causes for which they are passionate about, regardless of tax implications. Connect with your donors and engage with them through meaningful touch points such as social media, email, direct mail, or even a live event. Keep your current donors engaged.
Create differentiation among the sea of nonprofits:
Donors want to know what makes your nonprofit uniquely qualified to solve problems. Ultimately, it’s not about the increase in AGI deductibility, removal of the Pease Rule, etc. This is accomplished through storytelling.
Know the sky is NOT falling:
Donors give to charities for many reasons. Tax benefits have historically been near the bottom of reasons on that list.
Donor questions about the impact of TCJA present another wonderful opportunity to tell your story, share your successes, and to involve your donors in your great work.
Want to learn more? Download a free #NFGTips webinar 3 Ways the New Tax Reform Act Impacts the Nonprofit Community as we dived into this topic in detail with our very own John Gilchrist.
*NOTHING IN THIS ARTICLE IS INTENDED, NOR SHOULD BE CONSTRUED, AS PROFESSIONAL TAX ADVICE.