We know why individuals donate their hard-earned cash to their favorite charity or their nephew’s birthday fundraiser on Facebook. It’s because a story or mission moves them to play a small part in changing the world, or at the very least, they’re trying to do the right thing and make life easier for someone else.
In years past, donors received tax deductions for charitable contributions, shaving money off one’s tax bill if he or she itemized rather than taking the standard deduction. Under the new Tax Cuts and Jobs Act, however, it’s a bit more difficult to receive tax deductions for charitable contributions.
Giving Under the New Tax Law
With the 2017 Tax Cuts and Jobs Act now reaching full implementation in 2019, the threshold to itemize is much higher. So for many, the traditional approach of itemizing charitable contributions is no longer as beneficial. Now is the time to consider what new tactics are available to nonprofits in overcoming new giving barriers.
Important Facts About the Tax Cuts and Jobs Act:
- The new tax law nearly doubled the standard deduction in 2018
- Single individual deductions increased from $6,350 to $12,000 and for joint filers, $12,700 to $24,000.
- Imposed a $10,000 cap on the amount that individuals can deduct for state and local taxes
- Eliminated personal exemptions
- It’s estimated that the number of taxpayers who itemize deductions will decrease to 19.3 million by 2018, resulting in a $13 billion annual loss
- There was nearly a 5 percent drop in 2018 donations
With the new tax law in place, it’s increasingly important to utilize new strategies that will not only allow for individual tax savings, but also supports continued charitable giving.
Tactics for Overcoming New Barriers
Bunching: concept being the taxpayer makes larger donations (typically two-three years’ worth) in a single year.
- Net worth is large enough to allow donor to itemize deductions for the year
- Following year, no donation or smaller donations would be made to compensate for giving the larger donating in one year
- For taxpayers that don’t have large amounts of money laying around, they can consider a donor advised fund, which lets them deduct their full gift and then direct the money to charity over time
- For taxpayers 70 ½ or older, they can make a tax-free contribution from an individual retirement amount (IRA) to an eligible charity in what is known as a qualified charitable distribution (QCD)
- Though the amount wouldn’t be written off, it means they wouldn’t owe income taxes on the withdrawal
- Donating non-cash property has its advantages because the donor can avoid paying capital gains taxes on the appreciation of the assets
- Examples of donation assets:
- Mutual fund shares
- Other non-cash assets such as artwork and collectibles to public charities
- For taxpayers who live in a state with high income taxes, charitable giving is increasingly appealing
- If the limits on state and local tax deductions push taxpayers’ overall tax rate higher, the value of their donation is higher too. Meaning that by donating, they save on higher amount in taxes
Next Steps: Plan, Inform, Engage
- Make a plan of action. Planning is key to making sure that (a) charitable gifts keep coming and (b) that donors understand their options
- Consider how to best inform your donor base about the new tax law and what it means for them and for your non-profit
- Engage with your donor base providing them with the resources and tools to manage their tax funds ahead of time