Many people are asking how the new federal tax law will impact charitable giving to nonprofits.
While we don’t have a crystal ball to predict the future, the key provisions of the new bill do give us some insight into some of the potential outcomes for nonprofits, especially those in California. And they seem to present a few significant challenges.
We take a look at these one by one – and also at what the changes might mean for government funding; we also suggest how you can best prepare your organization for the expected challenges ahead.
New federal tax law: Key provisions
The main provisions of the new tax law that may impact charitable giving include:
- An increase in the standard deduction;
- Limits on tax deductions for state and local taxes (SALT);
- Lower marginal tax rates;
- New tax cuts for businesses and their owners;
- An increase in the exemption for estate taxes.
Increase in standard deduction
With the increase of the standard deduction, many people who currently itemize their deductions will no longer do so, instead claiming the standard deduction.
Taxpayers who currently itemize may have modest deductions for mortgage interest, property taxes, state income taxes, and charitable contributions.
The new law means that, for many taxpayers, the new, increased standard deduction may exceed the deductions they currently itemize; so they will take the “fixed” standard deduction instead.
These taxpayers will no longer receive a “rebate” in the form of a tax deduction when they make charitable donations. As a result, the true cost of donating becomes higher.
Limits on SALT deduction
Despite the increase in the standard deduction, many taxpayers will continue to itemize deductions, including those who pay significant state income taxes, as well as homeowners (especially those who paid top dollar for their homes in recent years).
However, deductions for state and local taxes (SALT) will be capped at $10,000, meaning that many taxpayers will only be able to deduct a tiny fraction of the total SALT that they pay each year.
They will have a higher tax bill and less disposable income for making contributions to charity.
Lower marginal tax rates
For many taxpayers who continue to itemize, their marginal federal tax rate will be lower, which means that contributions to charity will not be worth as much in terms of a tax deduction.
As a result, certain taxpayers may be less inclined to donate, especially if they are also affected by the new limit on the SALT deduction.
Tax cuts for businesses and their owners
The new tax bill was designed to provide significant tax benefits to corporations and their owners.
Many will pay less in taxes and have more disposable income, which could lead to more charitable giving.
However, those who find themselves with a lower marginal tax rate may feel less inclined to donate to charity because donations will come with a smaller tax deduction.
Lowering of estate taxes
With the doubling of the exemption for estate taxes, there is less of an incentive for donors to consider charitable giving in their estate planning. This could result in fewer and/or smaller bequests.
Effects on government funding for nonprofits
Many estimates have the tax bill adding over a trillion dollars to the national debt. Many people are wondering if the current Administration and Congress will try to pay for this with cuts to federal programs, which many nonprofits rely on for funding.
It’s difficult to predict what the state and local governments might do to address some of the potential problems identified above. They do have the power to raise taxes, but may feel pressured not to do so by middle-income and upper middle-income voters who find themselves cash-strapped by the new law.
What steps can nonprofits take to prepare for the changes?
While the new tax law seems pretty scary for nonprofits, especially in hard-hit states like California, here are three things you can consider doing to lessen the impact:
- Hone your message! People don’t just donate for a tax deduction.
Remind donors how important your work is. Before the new tax law, many people made charitable donations even when they didn’t get a deduction. They had no financial incentive to donate, and still won’t. They donated because they are passionate about the mission of the organizations to which they give.
Since the 2016 election, people have been more energized and engaged in the organizations and causes they care about. In fact, contributions to organizations like the ACLU and Planned Parenthood have surged, and such donations to 501(c)(4) organizations are not tax-deductible. It’s passion, not financial incentive, that drove those donations.
- Diversify your funding streams and your funders.
Nonprofits have weathered financial storms before. During the Great Recession, nonprofits that relied on a diverse mix of revenue streams (e.g. individual donations, foundation grants, government contracts, program fees, membership dues, etc.) tended to fare better than those that relied predominantly on one type of funding. Try to tap into the wealthy donors and big corporations who will see a cash windfall under the new tax law.
- Lobby your state lawmakers to do something about it.
Nonprofits are allowed to engage in some lobbying activity but check out the regs to make sure you don’t mess up. California lawmakers have already started to float some pretty innovative ideas.
Want to find out more about the new federal tax law and how they might affect your California nonprofit?
Contact us here or follow up with some additional reading:
The GOP tax reform will devastate charitable giving – LA Times – 12/27/2017
Charitable giving to take a hit from the tax law – CBS News, 12/28/2017
Nonprofits are the unintended victims of the new tax bill – The Hill, 12/29/2017
How are nonprofits affected by the Tax Cuts and Jobs Act? – Nolo
The new tax law and its impact on nonprofits – Part 1 – The NEO Law Group, 1/7/2018
