Tax reform and the cloudy impact on charitable giving

With tax reform one signature from becoming law, many organizations and individuals have been asking the Stanislaus Community Foundation “how will this affect charitable giving?”

As with any piece of major legislation, there will be provisions that impact many sectors of the economy, and it’s likely the country’s nonprofit sector – including local nonprofit organizations – will experience some significant changes. While parts of this new legislation won’t likely to go into effect until January 2019, it’s important we all understand the charitable tax ramifications as we plan for 2018 and beyond.

I’ve highlighted two of the most relevant changes, but please understand there are several provisions that will affect charitable giving in the years to come. I encourage you to consult with tax and legal professionals as soon as possible to discuss how this might impact your financial situation.

Standard Deduction

Under United States tax law, the standard deduction is a dollar amount that those who don’t itemize can subtract from their income before income tax is applied. In 2017, the standard deduction is $6,350 for single filers and $12,700 for couples filing jointly. Taxpayers can choose that standard deduction or itemize all their expenditures that qualify to be deducted from their taxable income – such as state income taxes, some educational expenses, work clothing, charitable contributions and hundreds of others. If your total of itemized deductions doesn’t reach that figure, you’re better off not itemizing.

Current tax law allows anyone to contribute up to 50 percent of their adjusted gross income in cash to designated charitable organizations – though most give a far smaller percentage. Since those contributions are deductible, most who give itemize their contributions and those deductions can help push them past the standard deduction. This provides an incentive for individuals and corporations to donate. Not only does it reduces their tax burdens, it encourages community investment and helps those in need.

In California, about a third of taxpayers choose to itemize and many list charitable contributions. Using 2015 Stanislaus County numbers from The Chronicle of Philanthropy, local residents itemized $190 million in charitable gifts at an average of $4,021 per tax filer.

But under the new tax law, the standard deduction will be doubled – making it harder to itemize specific, deductible items and eliminating the tax incentive for many to make charitable contributions. If there is no tax incentive, many will decide not to give to charitable organizations.

According to the nonpartisan Tax Policy Center, this provision would reduce charitable giving in the United States from $12 billion to $20 billion annually and reduce the number of charitable gifts by roughly 25 million.

Estate Tax

In 2017, the Federal estate tax on individual estates over $5.49 million or joint estates worth $10.98 million was 40 percent. To reduce that tax burden on their heirs, many families plan to leave a portion of their estates to one or more charitable organizations. These are often large-scale and long-term bequests to schools, universities, nonprofit organizations and community foundations.

Under the new bill, the Federal estate tax deduction would be doubled, removing the incentive for many families to leave any portion to charitable organizations. The Tax Policy Center estimates a charitable giving loss of from $4 billion to $20 billion annually based on this change alone.

The Bottom Line

Making charitable gifts is a personal decision. These changes to the tax code will certainly affect some giving throughout Stanislaus County.

However, they don’t impact generosity. Those individuals and organizations that value our community and its spirit will continue supporting the institutions and causes they care about.

In our role as a place-based funder, Stanislaus Community Foundation is committed to building a culture of philanthropy – a culture that supersedes federal legislation and rather builds on our commitment to our community. We will continue to rally local philanthropists in support of local issues.

We will continue our focus on building organizational and systems leadership. And yes, we are committed to investing in local nonprofits, both in grant dollars and in their capacity to respond to the community’s needs in new ways.

This story was originally published December 20, 2017 at 10:42 AM with the headline "Tax reform and the cloudy impact on charitable giving."