The New Charitable Tax Laws: Balanced Perspectives, Myth-Busting, and What We Can Do Next
The Tax Cuts and Jobs Act of 2017 enacted numerous changes related to charitable giving. If the initial public outcry was to be believed, most of these changes will reduce giving. Two commonly cited analyses, based on earlier versions of the bill, predicted drops of 4.6% to 8.5% in overall national philanthropy. However, we believe the reality will be much more nuanced, and that a decline is not inevitable.
First and foremost, people give for many reasons other than tax benefits. Whether it's a desire to make the world a better place, the continuance of a family tradition, social motivations, or due to many other factors, most of the reasons people give have nothing to do with tax law.
A Balanced View
When it comes to tax law, though, there's no question that the doubling of the standard deduction by the 2017 Jobs Act will reduce perceived tax benefits for donors who stop itemizing their tax returns. This is because those who itemize see a direct connection between each charitable gift and the tax deduction that often accompanies it. A recent estimate predicts that only one in seven taxpayers will itemize instead of one in three. That's a lot of people who will lose the benefits of itemization! However, it's important to keep in mind the many factors that could mitigate this change:
- The remaining itemizers still give A LOT: For several decades an increasing proportion of philanthropy has been coming from a decreasing number of (higher income) donors. Those philanthropists will continue to itemize and give disproportionately more per capita than those who stop itemizing.
- Wealth effect: Higher income households stand to benefit the most from tax cuts from this bill, resulting in more take-home pay. This 'wealth effect' should help mitigate the loss of itemization for some donors.
- Capital gains status quo: Gifts of appreciated assets (such as stocks) are growing in popularity and importance. Capital gains tax was unchanged by the Jobs Act, which means that donors enjoy the same tax benefits as before for what we believe will be a growing form of philanthropy.
- IRA status quo: Diverting IRA distributions to charities ("Qualified Charitable Distributions") is another tool for giving that's been growing in popularity. Qualified Charitable Distributions continue to be excluded from taxable income, which means they'll be another growing tool for making gifts.
- Increased AGI limit: The limitation of how much adjusted gross income (AGI) can be deducted through charitable gifts was raised from 50% to 60% of total AGI. While at first blush this would seem to only benefit very wealthy donors who could afford to give away a majority of their income, this change could be a boon to many seniors whose post-retirement income is low, but whose savings and other assets are significant. For this group, the increase in the AGI limit could unlock more philanthropy.
- Major and modest gifts: Research suggests that deductibility of gifts is less of a consideration for major ($10,000+) and more modest (less than $1,000) donations. Donors who give in these ranges are likely to be less deduction-sensitive than those who give in the $1,000 - $10,000 range.
- Elimination of Pease Amendment: Although only affecting the some of the highest earners in the country, the 2017 Jobs Act eliminated the Pease Amendment that previously reduced the total charitable deductions available to very high-earning itemizers. Because philanthropy has continued to concentrate toward the highest earners, the elimination of the Pease Amendment could trigger more giving by wealthy philanthropists.
It's also important to do some myth-busting around some of the solutions we've been hearing and reading about:
- Bunching Isn't Limited to Donor-Advised Funds: Nearly all press concerning the tax bill recommends "bunching" by donors, which means they give more in one year to trigger itemization benefits, then contribute less the following year(s) and forego itemization in those years. Press positioning of donor-advised funds as the only tool for bunching, however, is an overly narrow perspective. Bunching can be accomplished (arguably in a higher impact way) through permanent charitable funds as well, where a donor "bunches" a significant gift up front into a fund that pays out annually to a designated nonprofit forever. Plus, donors don't have to remember to trigger giving in non-itemizing years!
- QCDs cannot be directed to Donor-Advised Funds: Under federal law, qualified charitable distributions by IRAs CANNOT be directed to donor-advised funds, but CAN be directed to permanent charitable funds or directly to nonprofits.
What We Can Do Next
The reality is that no one knows what the overall impact of the tax law changes will be, but some cautious optimism is emerging. 50% of nonprofits in a recent survey believe that their donations will remain the same or increase in 2018, while only 20% predict a decrease. So what are some practical things we can all do to help maintain, or even increase, local giving? Here are some suggestions:
- Highlight the potential positives of the changes to donors
- Emphasize values over transactional mindset
- Encourage planned and legacy giving
- Highlight nonprofit endowments as a long-term buffer to the political and economic volatility that was played out as part of the 2017 Jobs Act
- Keep the community informed as we learn more
We know that different kinds of local nonprofits will be affected in different ways. We will keep our ears to the ground and focus on finding ways to help donors maintain or increase their generosity!
Please note that AAACF is providing general observations, not specific legal or tax advice.