In December 2017, the Tax Cut and Jobs Act became law. This law, which represents the biggest overhaul of the tax code in over 30 years, does not, at first glance, seem to have a big impact on charitable donations. In fact, in one area, the limits on charitable donations became more liberal. However, when you look at some of the business and individual provisions, it seems likely that there will be at least some negative impact on charitable giving.
First, the good news. The area in which the charitable donations became more liberal is the percentage of an individual taxpayers’ adjusted gross income that can be deducted as cash charitable contributions. Through 2017 that percentage was 50%. Under the new law, that has been bumped to 60%. Of course, as a practical matter, most individual taxpayers weren’t coming close to the old limit in their charitable donations, so this provision is not likely to lead to any meaningful boost in donations.
For businesses, the law decreased the corporate tax rate, with the top rate dropping from 35% to 21%. This means that, for businesses making charitable contributions, the after-tax cost of the contribution has increased. Under the old rules, a corporation in the top tax rate making a donation of $10,000 would receive a tax benefit of $3,500, so that the contribution effectively cost the company $6,500. (This, of course, assumes that the contribution would be fully deductible by the business. Corporations can deduct contributions up to 10% of their taxable income before this deduction – this wasn’t changed in the new law.) Under the new law, the same corporation would only receive a tax benefit of $2,100, thus raising the after tax cost to $7,900.
Individual incentives for charitable giving have also been reduced. Not only have individual tax rates been reduced (though not to the same degree as the corporate rate), but changes in the rules surrounding other deductions commonly taken by individual taxpayers make it less likely that an individual donor will receive any tax benefit from their contribution.
This occurs for two reasons. First, the deductibility of some common deductions has been cut back. The deductions for state and local taxes, including income, sales and property, is now capped at $10,000. Miscellaneous itemized deductions, formerly deductible to the extent they exceeded 2% of adjusted gross income, have become non-deductible. Perhaps most significantly, the standard deduction that all individual taxpayers are entitled to has almost doubled – from $6,350 to $12,000 for a single taxpayer and from $12,700 to $24,000 for a married joint return.
For example, assume a married taxpayer has adjusted gross income of $200,000, pays $5,000 in state income taxes, $8,000 in property taxes, mortgage interest of $7,000, and charitable contributions of $6,000. In 2017, this couple has itemized deductions of $26,000. They will deduct that amount from their adjusted gross income as part of arriving at their taxable income. They have deducted $13,300 of these costs in excess of the standard deduction they are otherwise entitled to. Given that the other components of their deductions are mandatory payments, one could easily say they have received a tax benefit from their charitable contributions of $6,000 multiplied by their tax rate.
In 2018, the same taxpayer would have itemized deductions of $23,000 – $10,000 in state income and property taxes, $7,000 of mortgage interest and $6,000 of charitable contributions. However, they now have a standard deduction of $24,000. Thus, they are getting no additional tax benefit from any of their deductions.
It is unclear at this time what the effect of these changes might be on charitable giving. When making charitable donation decisions, there are studies showing that people are primarily motivated by their feeling about the organization, with tax considerations being secondary. At the same time, the laws of economics would suggest that, if the cost of something increases, less people will “buy” it. Further, many of these changes are, under the law, scheduled to expire at the end of 2025. At that time, the rules are supposed to return to what they were in 2017.
It is too early to know how all of this will ultimately shake out for not-for-profit organizations. However, at least through 2025, you should be bearing these changes in mind when designing your fund raising strategies. To the extent your campaigns have included anything about the tax benefits, you may need to rethink how to approach this.