When change occurs, there are always winners and losers. With the new tax reform signed into law recently, many articles have been written about the anticipated impact these changes will have on individuals and businesses. However, the impact tax reform may have on nonprofit organizations has received limited media focus. Reform may directly impact the charitable contributions of millions of taxpayers. With tax incentives to donate most likely diminished, nonprofits may struggle to find alternative ways to replace financial support. Let’s look at these major changes that could discourage charitable giving:
The tax reform –
• lowers individual income tax rates, thus reducing the value of all tax deductions. The Tax Policy Center estimates that the individual income tax rate change will reduce the average marginal tax benefit of charitable giving from 20.7% to 15.2%. While the marginal tax benefits of charitable giving will decline significantly for low and moderate income tax itemizers, giving is not expected to significantly change for the highest-income taxpayers;
• caps the state and local tax deductions at $10,000 and increases the standard deduction to $12,000 for single persons, and $24,000 for married couples. According to the Tax Policy Center, those two steps are expected to reduce the number of taxpayers itemizing their charitable contributions by more than half, with the share of middle-income households claiming charitable deductions falling even more by as much as two-thirds;
• and doubles the estate tax exemption to $22 million for couples, which will discourage tax motivated bequests by wealthy households.
These changes may result in significant reductions of charitable contributions, depending on the structure of a particular nonprofit’s donor base. Likely we will see gifts coming from fewer contributors overall, with the bulk of donations coming from higher income donors. It will be interesting to see how the new tax law will impact nonprofits in various regions of the country. For example, right now we do not think that there will be a significant impact on California charities, especially those whose donor base resides in the more affluent areas of our state, like Silicon Valley.
Above all, we as donors should not let the potential financial impact from this tax reform prevent us from continuing to support the great mission of many wonderful nonprofits in our communities. Through continuing our philanthropic ways, we can all feel like winners.