At the end of 2017, President Donald J. Trump signed the Tax Cuts and Jobs Act, which led to the most comprehensive overhaul of the U.S. Tax Code in over thirty years. The overhaul impacted almost every United States citizen and organization, including nonprofits and their generous donors. Most braced themselves for the Act to have a significantly negative effect on the philanthropic world. How long until any major ramifications manifest remains to be seen, but what is clear is how imperative it is for nonprofits to stay informed as taxpayers navigate the first tax season since the Act went into effect. Here’s what nonprofits should keep in mind about how tax reform may impact individual taxpayer behavior.
In general, the Tax Cuts and Jobs Act lowered individual income tax rates and roughly doubled the standard deduction for individuals to $12,000 and $24,000 for joint filers. This increase may disincentive taxpayers from itemizing their deductions. Even for taxpayers who choose to itemize their deductions, the incentive is limited because less taxes are saved with charitable deductions than before the Act went into effect January 1st, 2018.
Will reducing the tax incentive to give result in fewer individual donations to nonprofits, or will taxpayers simply change how instead of how much they give? Some taxpayers may handle their giving by doubling donations in one year and giving nothing the following year. Therefore, they would itemize in the first year, taking full advantage of all donations, and take a standard deduction the next.
While the answer remains unclear, nonprofits aren’t without hope. Some components of the Act incentivize charitable giving. The Act repealed the “Pease limitation,” removing the limit of itemized deductions individuals can make. Another positive change to limits on giving is cash donations for itemizers increased from 50% to 60% of adjusted gross income. While the average American may be less financially inclined to give, these changes may inspire high earners who itemize their deductions to increase their charitable gifts.
Other changes, such as doubling the estate and gift tax basic exclusion amount and requiring that unrelated business income tax (“UBIT”) to be calculated in isolation, continue to render the effects of tax reform on nonprofits uncertain. In states like California and New York, nonprofits fear the $10,000 cap on state and local income and property taxes could prompt budget cuts, which could eliminate state programs and force nonprofits to fill the gap left by decreases in state funds. Fortunately, Georgia is not considered a high tax state with its median household only paying $100 more than the average American household.
If your nonprofit is concerned with the impact the changes to the U.S. Tax Code could have on your organization, contact Fricke & Associates, LLC. We’re here to help!