Charitable Deductions More Limited: The New Tax Law and Nonprofit Fundraising

On Dec. 22, 2017, President Trump signed the most far-reaching tax legislation since the Reagan era. The measure reduces taxes, and thus government revenues, by an estimated $1.5 trillion. It may also significantly impact the number and size of individual financial contributions to nonprofits.

U.S. government support for charitable giving has historically taken the form of tax deductions, and the new tax bill leaves those deductions nominally in place. For practical purposes, however, they will no longer be available to millions of Americans.

Fewer Deductions, Fewer Donations

Three-fourths of nonprofit donations come not from foundations or corporations, but from individuals, whose gifts are subsidized by the individual income tax deduction.

Last year the deduction permitted a donor who gave $1,000 to your nonprofit (and itemized deductions) to save around $200 to $300 in taxes, depending on his or her income. Your organization received $1,000 in real money, but your donor, with the tax break, was out only $700 to $800.

The U.S. Treasury took the hit, and for a century that’s how U.S. society has promoted giving. But the new law doubles the standard deduction, making it more economical than itemizing for millions of households—including half of those who earn between $75,000 and $200,000 a year.

The new law also restricts other deductions, including those for mortgage interest and state and local taxes.

Consequently, the number of itemizers is expected to drop from the current 30 percent to 5 percent. Because a charitable gift can be deducted only if it’s itemized, just one in 20 taxpayers will now have a financial incentive to donate.

The Urban-Brookings Tax Policy Center expects 33 million fewer people to deduct charitable gifts this year due to the increased standard deduction, and individual donations to fall by at least $12 billion or more. The National Council of Nonprofits (NCS) estimates more than a quarter-million nonprofit jobs could disappear.

The ultimate impact of the new tax law is yet to be seen. It will negatively impact the decision of those who donate primarily for the tax benefit.

Those who give to support the worthwhile missions of nonprofits and consider the tax deduction a secondary benefit should not be as negatively impacted. Only time will tell, but the importance of telling your story and explaining your mission to your supporters becomes even more important.

The top 5 percent of taxpayers will continue to itemize, take the deduction, and donate. Nonprofits will see a decline in gifts from midlevel earners—who tend to sustain social-service organizations over museums and colleges.

Bequests Will Fall Too

Bequests to nonprofits, which are exempt from estate taxes, will decrease. While the estate tax today affects only very wealthy families—those with estates over $11 million—the new tax law doubles that qualifier to $22 million, so only an even tinier portion of U.S. estates will benefit by making charitable bequests.

  1. Taken together, the doubling of the standard exemption and the estate tax exemption could reduce overall charitable giving by up to $20 billion, according to the NCS.
  2. Donor-Advised Funds and “Bunching”
  3. For those who itemize, donor-advised funds (DAFs) will continue to be attractive because they offer the maximum tax benefits—an immediate deduction, no estate or capital gains tax, and tax-free growth.

But nothing requires any actual distribution of money from a DAF—so an inactive fund could attract and sit on money a nonprofit would spend on its mission.

Some investment managers also encourage “bunching.” This advice encourages donors to itemize and give one year but take the standard deduction and not give the next year. For nonprofits, such alternation will create a long and stressful two years between the horns of plenty.

Do More with Less

In response to legitimate concerns about reduced giving, some have suggested that people will give more to charities if they have more money to give, which lower taxes will provide. That remains to be seen.

What’s clear is that most nonprofits are concerned about a reduction in bequests and midlevel individual donations. How that will impact your nonprofit and your ability to meet your goals will be worked out over the next year. There are no easy answers, and success will require creativity and innovation across the board.

Is it time for a full review of your nonprofit’s fundraising prospects? Our ASL Nonprofit Group can help you understand the new tax reform.