The TCJA and the Future of Giving: Should You Be Worried?

Charitable giving is ingrained in American culture. But in the wake of the Tax Cuts and Jobs Act (TCJA), many in the nonprofit world are worried about the future of donations and, in turn, the longevity of nonprofits. So how will the first major update to the tax code since 1986 impact giving, and what tax strategies can donors use?

Anticipated Effects of the TCJA

Since the 1970s, gifts to charity have consistently equaled about 2% of our country’s GDP, regardless of the economy or politics. Even with such a stable history, some in the nonprofit sector are concerned that tax reform will reduce charitable giving by a noticeable degree.

The legislative change expected to have the biggest impact is the increase in the standard deduction. Pre-TCJA, 33% of taxpayers itemized their deductions. Post-TCJA, this number is expected to drop to 14%. With fewer people itemizing, the argument goes, fewer people will have a tax incentive to donate.

Will the loss of a tax deduction really stop people from donating? Perhaps, but it may not have as big of an impact as one would expect. The top 1% of earners contribute 33% of the individual donations across the country, and 18% of charitable contributions come from individuals who don’t itemize at all. These populations are expected to continue donating, regardless of the legislation.

On the other hand, some provisions of the TCJA could actually encourage an increase in charitable donations, including the:

• Higher charitable contribution limit. This threshold was raised to 60% of adjusted gross income, up from 50%, providing an opportunity for individuals to give more.
• Higher AMT exemption. The new income threshold for the alternative minimum tax (AMT) increased by nearly $25,000 to $109,400 for married couples filing jointly, and by $16,000 to $70,300 for single filers. So there will be fewer taxpayers subject to the AMT and more who are eligible for the full charitable deduction.
• Lower corporate tax rate. With this rate at a historically low 21%, corporations will have more cash on hand, giving them more opportunities to donate.

State involvement is another wild card. Because the future of giving remains uncertain, many states have decided to tackle the issue on their own.

Some, for example, are considering offering a payroll tax credit for charitable donations rather than an income tax credit. Others are discussing a system whereby individuals will receive a voucher based on the value of their donation that they can use to offset state taxes. Still others are supporting federal legislation such as the proposed Charitable Giving Tax Deduction Act, which would make the charitable deduction an above-the-line deduction, providing even more powerful tax benefits to donors. Whether any of these ideas will materialize into actual legislation remains to be seen, however.

Donor Tax-Planning Strategies

Donors want to know about how the tax law changes will affect them and what strategies they can use to allow them to continue donating. Although you should never give donors tax advice, as long as your discussions are framed as a way for them to support the cause that they are passionate about, your organization should be on safe footing.

While there is no one strategy that will work for everyone, a few techniques that donors can consider to maximize their charitable tax deductions are:

• Timing their donations. Because the election to itemize or take the standard deduction is made on an annual basis, taxpayers can choose to itemize their deductions every other year. Donors can bunch two years’ worth of donations into one tax year and elect to itemize deductions in the years they donate, while taking the standard deduction in non-donation years. By bunching deductions in this way, they can exceed the itemized deduction threshold in alternate years.
• Considering bequests. While bequests are nothing new, many taxpayers forget that they are an option. Bequests directly support a charity of the donor’s choosing while also reducing the taxpayer’s estate tax liability.
• Donating from IRAs. Because IRAs are subject to both the estate tax and income tax, donors may consider instead assigning those distributions directly to a charity.
• Creating a donor-advised fund (DAF). These funds are sponsored by another charitable organization. The donor may contribute to the DAF and take a tax deduction in one year, and then wait to choose charitable recipients in later tax years. DAFs allow donors flexibility in timing their donation deductions and their charitable distributions.
• Setting up a private foundation. While they are not as flexible as DAFs, foundations can be helpful to those who want to create and run their own charitable giving program, even well past their lifetime.
• Opening a charitable remainder trust (CRT). A CRT allows a donor to benefit from the income generated by an asset during their lifetime, while leaving the asset to charity upon their death. This allows the donor a charitable deduction at the time of the gift, but the donor doesn’t have to forego income from the asset.

Don’t Discount Personal Motivations

Let’s not forget the most important reason why people donate: They care about the cause. Speaking on a panel at the 2018 Armanino Nonprofit Symposium, JP Morgan wealth advisor Stephanie Zaffos recommended nonprofits tap into givers’ personal motivations by showing them what the community would be missing without the nonprofit’s services. Social media can play a great role in this area. A 30-second video that gets to the heart of the problem can tap into individuals’ motivations and encourage even more giving.

She urged charities to stay agile and find ways to stay relevant by doing something a bit more forward-thinking. For example, accepting Bitcoin donations or allowing individuals to use their credit cards at a donation kiosk might rekindle donor enthusiasm. “People like to talk about what’s cutting edge and what’s new,” Zaffos said.

Optimistic Outlook

Although donations may fluctuate as donors figure out their new tax strategies, charitable contributions are unlikely to take a major hit because of the TCJA. The bottom line is that good donors will remain good donors, even without the tax incentive. Donors know, said Zaffos, that these days, “it’s actually more important than ever for people to give [more] and not to give less.”

August 24, 2018