While the 2017 tax law benefits corporations and individuals, it affects charitable contributions. Nonprofit organizations may be the biggest losers under the new law. The new law went into effect on January 1, 2018 and will not affect 2017 income taxes.
New tax laws affect charitable contributions
While early negotiations in the tax reform process included eliminating charitable contributions, the new tax law retains the tax deduction for charitable contributions. In fact, it enables taxpayers to contribute more and take a deduction. Under prior law, taxpayers could not deduct more than 50% of their adjusted gross income in charitable contributions. The TCJA increases this limit to 60%, which will help wealthy donors to give more each year.
However, regardless of their intent, many taxpayers donate to nonprofits only if they itemize their personal deductions instead of taking the standard deduction. The new tax law increases the standard deduction for individuals and married couples, which reduces the number of taxpayers who will itemize deductions on their taxes. Without the incentive of lowering taxes with their charitable contribution, many individuals will not donate as much as previous years.
Lower tax rates reduce tax breaks
Also, the new tax law reduces tax rates at most income levels, which lessens the tax benefit of making a charitable contribution by those who continue to itemize. So for those who do still itemize, the lower tax rates will decrease the tax benefit of making contributions. A study by the Indiana University School of Philanthropy and Independent Sector concluded that changes such as these will reduce charitable giving by 1.7% to 4.6%. That’s an annual reduction between $4.9 and $13.1 billion. Others estimate the losses could amount to as much as $20 billion per year. A recent study by George Washington University concluded new law will result in a loss of at least 220,000 non-profit sector jobs.
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Reduction in estate tax impacts donations
The new law also reduces the number of taxpayers subject to the federal estate tax. One of the main reasons wealthy individuals make charitable bequests in their wills is to help reduce the amount owed for estate taxes. Charitable bequests are not subject to this tax. This reduction in the estate tax will also adversely affect the amount donated as charitable bequests, but early estimates vary as to the amount of the decline.
As a nonprofit that depends on charitable donations to fund your programs and achieve sustainability, you need to be proactive to address the new realities of the tax law and how it will affect the donor’s giving.
Some things you can do to maximize donations include:
- Stay engaged with your donors by reaching out to them to explain the impact the new tax bill will have on their donations.
- Make sure you communicate the importance of each donor’s charitable gift, regardless of the size.
- Make your donor’s aware that without their charity, your organization cannot fulfill its mission.
- Remember that most donors will give out of concern, commitment, and their willingness to help.
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Bottom Line
All this points to a brave new world, a new normal for nonprofits. Proper fiscal management, proactive fundraising practices and community and donor engagement will help your nonprofit continue to serve the community and your constituents.
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Great article. Thank you so much for sharing!
-Anna, current Araize user of organization CPAF