The newly-passed federal tax legislation could have dramatic impacts on philanthropic giving, charitable organizations, and the work of nonprofit fundraising professionals. Nonprofits have long benefitted from itemized tax deductions for charitable giving, which have been a part of the U.S. tax code since 1917, and any changes in this area of tax law may have significant effects on donation levels. But, the potential impacts go beyond revenues. The allowable activities that nonprofits can pursue while maintaining 501(c)(3) status are also regulated by the tax code. In the hundred years since the individual donation deduction was established, the Internal Revenue Code regulations pertaining to charitable organizations have evolved to increasingly define and regulate legislative and grassroots lobbying while prohibiting charitable organizations from engaging partisan political activities, most notably through the 1954 Johnson Amendment. While the new law does not repeal the Johnson Amendment, changes to allowable activities under this area of the tax code could completely alter the social purpose and function of charitable organizations- and of those who work to support them. Part I of this article, The “Tax Cuts and Jobs Act” and Impacts on Giving explores the new tax law, its potential impacts on charitable giving, and possible strategies for moving forward. Part II, The Johnson Amendment and Implications for Fundraisers, reviews the history and intent of Johnson Amendment, the movement to repeal it, and the implications for nonprofits and especially nonprofit fundraisers.
Part I. The “Tax Cuts and Jobs Act” and Impacts on Giving
The final version of the new tax bill was officially passed on December 20th and signed into law by the President on December 22nd, 2017. The new law increases the standard deduction for individuals, couples, and heads of households to $12,000, $24,000, and $18,000 respectively, until 2025. Charitable gifts have traditionally been one of the most popular itemized tax deductions but under the new law, most middle and lower-income individuals will typically not have enough qualified deductions to exceed the higher standard levels, making itemization superfluous. The National Council of Nonprofits estimates that these higher standard deductions will decrease the number of those who itemize from 30% of taxpayers to less than 10% of taxpayers. Individual donors contribute over 70% of all funding to nonprofit organizations and according to Brian Gallagher of United Way Worldwide, 82% of all individual charitable gifts come from donors who itemize their tax return. Estimates of the potential reduction in charitable giving range from $13 to as much as $24 billion. However, the bill will also raise the limit on cash donation deductions for those in higher income brackets, who will continue to itemize deductions, from 50% to 60% of their adjusted gross income. This could help to balance projected losses, but may also widen the charitable giving divide by disincentivizing giving in middle and lower income tax brackets. This could potentially result in a less diverse philanthropic community, while giving the priorities of a smaller base of donors a disproportionate impact on nonprofit programming.
As it proceeded through congress, the new bill raised alarms for a wide range of charitable organizations, from The United Way, to the Salvation Army, and the U.S. Conference of Catholic Bishops. These organizations rely heavily on a large base of middle-income donors, who are more likely than their higher income counterparts to give to social-service agencies and religious organizations. But the greatest anticipated reductions in individual giving as a result of the new tax law are expected to occur for donors in the $50,000-$99,999 annual income range. In other words, at a time when government investment in the social safety net is diminishing and future cuts are likely, the organizations dedicated to serving the neediest in our communities, the homeless, the disabled, hungry children and families, may see the biggest drop in donations. Steve Taylor, Vice President of United Way Worldwide, worries the tax bill will force the organization to reevaluate its fundraising strategies to prioritize higher-end donors. “We don’t have any choice but to look to those higher-end donors more. We have to,” Taylor told The Washington Post. “But it’s not really what we want to do, and it’s not really healthy for the charitable sector in America.”
Other provisions in the new tax law that may indirectly impact nonprofit giving include a reduction in estate taxes and a $10,000 federal deduction limit on state and local income and property taxes. This reduction will have the most impact on high-tax states where state and local tax bills can far exceed this new limit, leaving donors with less to give. The new law also raises the estate tax exemption to over $11.2 million for an individual, which may lead to a decrease in charitable bequests, which traditionally have served the dual function of creating a lasting legacy for dedicated donors while reducing the future tax burden on heirs.
The full impacts of the new changes to the tax code have yet to unfold. But nonprofits, fundraisers, and individual donors can begin working together now to find creative ways to ensure that those who depend on their charitable support continue to receive it. Strategies to explore include:
Support the Universal Charitable Giving Act:
Since only taxpayers who itemize their deductions are able to withhold charitable donations, the new tax law is potentially calamitous by eliminating itemization for lower and middle-income tax payers. The Universal Charitable Giving Act (UCGA), was introduced in the Senate by Senator James Lankford (R-OK) but failed to be adopted. The UCGA would create an above-the-line charitable giving deduction for individuals who are not itemizing. As it proposed, individuals could not claim donations amounting to more than 1/3 of the standard deduction; raising that ceiling is important to ensure that the legislation does not actually have the effect of depressing larger donations. But reintroducing the UCGA could go a long way towards counteracting the anticipated giving reductions resulting from the new tax law.
Collaborate with Donor Advised Funds:
Donor Advised Funds allow donors to grow their philanthropic dollars over time. Donors make investments in the fund, typically starting at around $5,000, growing their charitable account until they choose to direct funds to a chosen charity. Donor Advised Funds have been controversial in the nonprofit world, primarily because unlike foundations, which are legally required to distribute 5% of their investment assets annually, Donor Advised Funds are under no such obligation. Additionally, donors receive their tax deduction the year the they contribute to the fund, not when the funds are disbursed to a specified organization. But under the new law, this could be an advantage. Donors could potentially combine the gifts that they would normally have given on a monthly or annual basis, invest those dollars into a fund, and stipulate monthly or annual disbursements to their chosen charities. This could allow midlevel donors to make a donation above the higher standard deduction and itemize for the tax credit, while still distributing smaller donations to multiple organizations.
Offer Options to Year End Giving:
The itemized tax deduction has been traditionally associated with a massive of influx of donations for nonprofits at the year’s end, and charitable organizations usually budget accordingly. In 2018, there may be a radical change in this established pattern and fundraising professionals will be working with their organizations, Board Members, and donor communities to plan accordingly and develop new giving options that allow them to continue receiving tax credits for their donations. For instance, without using a Donor Advised Fund as an intermediary, some midlevel donors may elect to plan their giving by “bunching” their gifts bi-annually, combining their annual donations to exceed the standard deduction threshold so that they can still itemize the gift, potentially incentivizing even larger cumulative donations from donors to the organizations they care about the most.
Make Your Case:
As United Way’s Sarah Caruso, President of the United Way Twin Cities told The Washington Post, “I’m not going to plan a retreat right now,” Caruso said. “I plan to go out and make the case for the need. And the need in the community is not changing.” As organizations enter the new year, it is important to remember that while the deduction for charitable gifts is been a powerful incentive, donors donate because they want to make a positive difference for their communities and the issues they care most about. The tax law has changed. But the good work that charitable organizations are doing and the good people who support that work have not.
Contact: Myshel Prasad, Resource Development Officer, firstname.lastname@example.org