As you are likely aware, Congress recently passed sweeping tax reform. While individual and corporate tax cuts are not something you immediately think about when budgeting for your not-for-profit organization, some of the new changes could potentially have an impact on donor giving.
After much debate, the Tax Cuts and Jobs Act was passed by Congress and is now signed into law by President Trump. While the bill is being heralded as a much needed tax relief to middle class Americans, there are some unintended consequences that could reduce the amount donors give to your organization.
Let's start with the biggest impact on not-for-profits. Under the new tax code, the standard deduction for individual and married filers will nearly double to $12,000 and $24,000, respectively. In addition to the doubling of the standard deduction, the bill reduces and eliminates some of the existing itemized deductions. For example, in the aggregate, state and local property, sales and income taxes will be capped at $10,000. Previously there were no limits on these deductions. What all of this means is that significantly less people will itemize their deductions. It is estimated that over 90% of filers will now take the standard deduction and will no longer receive a tax benefit for their charitable contributions. The Indiana University Lilly Family School of Philanthropy reported that charitable giving could be reduced by up to $13.1 billion as a direct result of this. The Joint committee on taxation (JTC) estimates that this drop would cost between 220,000 to 264,000 not-for-profit jobs.
Another source of revenue for not-for-profits is tied to the estate tax. The Tax Cuts and Jobs Act increased the estate tax threshold to $11 million and $22 million for individuals and married filers, respectively. This new limit is set to expire in 2025. The National Council of Nonprofits reports that charitable giving could be reduced by $4 billion per year with this increase in threshold.
There are also two other changes in the bill as it relates to not-for-profits. The bill creates a new 1.4% excise tax on net investment income of not-for-profit colleges and universities with assets of at least $500,000 per full-time student and more than 500 full-time students. However, it is estimated that this will affect less than 35 not-for-profit colleges and universities. The bill also levies a 21% excise tax on not-for-profits that pay compensation of $1 million or more to any of their five highest paid employees.
While reading all these changes at once, it might seem that your organization could be in trouble. However, try to remember that your donors give to your organization because they believe in its cause and the effect it has on the community, not for the nominal tax deduction they receive. The goodwill you have built with your donors does not disappear now that the tax write off has. With that being said, it doesn't hurt to be conservative when budgeting and to be proactive with your donor outreach in order to address the tax elephant in the room. You will more than likely be reaffirmed of your donor's commitment to the organization's mission.
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