Passage of the Tax Cuts and Jobs Act (TCJA) spread dismay in the nonprofit community. With several provisions in the law deterring charitable giving, nonprofits should mobilize to minimize the negative impact on their bottom lines.
What are the donation disincentives?
The TCJA made several changes that have reduced the tax incentive to donate.
- Dropped individual income tax rates, which, in turn, diminished the tax value of deductions,
- Nearly doubled the standard deduction to $12,000 for individual taxpayers and $24,000 for married couples filing jointly,
- Limited the state and local tax deduction to a total of $10,000 (reducing the total amount of itemized deductions effectively reducing the benefit of itemizing), and
- For 2018, roughly doubled the estate tax exemption to $11.18 million for individuals and $22.36 million for couples.
One of the TCJA’s goals was to reduce the number of taxpayers who claim itemized deductions — and taxpayers who don’t itemize can’t claim charitable donation deductions. In 2018, the nonpartisan Tax Policy Center estimated that the number of households claiming charitable deductions would fall from about 37 million to 16 million.
What can combat the expected trend?
In the face of these challenges, many nonprofits will need to alter their donation solicitation strategies. For starters, you might consider encouraging existing donors and potential donors to:
1. Bunch their donations. Charitable deductions generally have zero tax value for taxpayers who don’t itemize. With many previously popular deductions eliminated or limited, and the state and local tax deduction capped at only $10,000, many taxpayers will just take the standard deduction. By bunching their donations, though, taxpayers can accumulate enough itemized deductions to put them over the standard deduction hurdle for some tax years.
Bunching is simple — donors time their donations so that two annual gifts count for the same year. For example, a donor who normally gives every December could bunch donations in alternative years (giving in January/December 2020 and January/December 2022), or a donor could make five years’ worth of annual donations in a single year.
2. Establish donor-advised funds. Of course, bunching may leave nonprofits with some lean years between donations. With donor-advised funds (DAFs), donors can achieve similar tax benefits while providing a steadier stream of funding. Your donor can bunch several years of donations to a DAF in a single year to exceed the standard deduction. But he or she can ask the DAF’s administrator to pay out the funds annually in equal increments. That way, you enjoy regular gifts even in years the donor doesn’t itemize.
3. Make microdonations. You also might consider soliciting more microdonations — small gifts that donors don’t think twice about giving. Think of a quick $10 donation-by-text or a $15 per month automatic donation out of a checking account or to a credit card. This avenue of giving is becoming more popular, especially among younger donors who appreciate the ease. And donors who get on board with small donations when they’re younger and in their early income-earning years may well become bigger donors down the road.
4. Remember their philanthropic motives. There’s more behind most people’s charitable giving than the potential tax advantages. Remind donors of the on-the-ground impact of their donations and the differences they can make in the real world.
There are other strategies for bumping up donations. Keep abreast of suggestions offered in the nonprofit community.
Help them help you
No one can say for certain how TCJA will ultimately affect charitable giving.. But even if the direct consequences are less dire than predicted, these strategies can help your nonprofit maintain the steady donation levels you depend on to fulfill your mission.
An alternative for retiree donors
To combat the new tax law’s donation disincentives, nonprofits should consider promoting a giving technique that’s available only to donors age 70½ (or 72 under the new Secure Act) — qualified charitable distributions (also known as charitable IRA rollovers).
Qualified taxpayers can transfer up to $100,000 to charitable organizations (other than donor-advised funds or private foundations) every year from their traditional IRA accounts. Married couples can distribute up to $200,000 annually, if each individual maximizes their distribution. No charitable deduction is allowed, so it doesn’t matter if taxpayers itemize.
But, because the distribution is made directly by the IRA trustee to the charitable organization, the distribution from the IRA isn’t included in the taxpayer’s adjusted gross income (AGI). This reduces taxable income, makes it easier to obtain deductions subject to AGI floors and can avoid the net investment income tax. And, importantly, the payments count toward taxpayers’ required minimum distributions from IRAs.
For any questions or guidance related to your nonprofit organization, contact VonLehman’s specialized Nonprofit Group today at sallgeyer@vlcpa.com or by phone at 800.887.0437.
