Guest article written by: Betty Isler (Tax Managing Director) and Alicia Brown (Tax Manager)
Over the past year tax reform has been a hot topic in the news due to the uncertainty in what it would bring. That uncertainty left individuals, businesses and tax preparers in a state of limbo on how to plan for the upcoming year. Now that President Trump has signed the bill, proper planning can begin taking place.
While most of the tax reform reporting on the news was focused on individual and corporate tax changes, the not-for-profit sector was also affected by tax reform. Most not-for-profits depend on charitable giving from the general public to carry out their missions. Thanks to various sections of the tax reform, not-for-profits could see a significant impact in the amount of charitable giving normally received.
Many fear that the doubling of the individual standard deduction will discourage the middle class from contributing to not-for-profits if their itemized deductions are below the new standard deduction limits. In the past, most not-for-profits were supported by numerous, smaller contributions from the general public. While individually these contributions weren’t significant, when they were aggregated together it provided not-for-profits the necessary funding to carry out their missions. Without these contributions, not-for-profits will need to come up with some way to replace these funds.
One potential bright side for not-for-profits is the elimination of the phase-out of itemized deductions for high-income taxpayers. Once taxpayers hit a specified adjusted gross income in the past, the benefit received for their itemized deductions began to decrease. With this phase-out eliminated, taxpayers will receive a larger benefit from any contributions they make. This could result in high-income taxpayers giving larger charitable contributions to not-for-profits.
While it appears that these two changes to tax reform would be offsetting, it is projected by most tax professionals that the increase in large contributions from higher income individuals will not fully offset the decrease in contributions from the middle-class. Another consideration is that these two groups of taxpayers don’t generally donate to the same types of not-for-profit organizations. The middle-class donor is more likely to donate to social-service agencies and religious organizations whereas the wealthy are more likely to cut checks to support museums and universities.
Another change that could affect high income taxpayers and thus affect not-for-profits is the change to the estate tax. The exclusion amount went from $5 million to $10 million. This could mean people will be passing more of their income to their heirs instead of donating it to not-for-profits.
There are some other changes from tax reform that won’t have as much of an impact as the above but are worth mentioning. The 50% adjusted gross income limitation has been increased to 60% for cash contributions to public charities and certain private foundations with any excess being carried forward. This will allow taxpayers to contribute a greater percentage of their income to not-for-profits. The elimination of the contribution deduction for seating rights for college athletics will also impact a limited number of taxpayers and organizations.
So now that the changes from tax reform are known, what can individuals and not-for-profit entities do to plan for the changes?
For individuals to see the benefit of making contributions to not-for-profits, they should use a planning technique that has been around for years. Individuals can plan the timing of their payments and group their itemized deductions together in one year to get the most benefit for their deductions. This planning opportunity has generally been used in the past to group two years’ worth of real estate tax payments but can also be used for charitable contributions. For example, if an individual plans to contribute to a not-for-profit over a 4 year period, instead of making 1/4 of the payment every year they can pay 2/4’s every other year. The grouping of deductions in one year could help put them over the increased standard deduction threshold. Individuals will need to be careful of the new $10K state income tax and real estate tax deduction limit though if they are considering this planning technique. Individuals should consult their tax advisors to help plan this technique appropriately.
To keep up with the upcoming tax reform changes, not-for-profits will also need to consider changing the way they target donors. Not-for-profits might want to start targeting high-income taxpayers more than the middle class in campaigns to raise funds. The middle class shouldn’t be completely ignored or forgotten though. If donors are very passionate about the not-for-profits cause they are likely to continue donating to it even if they won’t receive a tax benefit for the contribution. If not-for-profits work to remind individuals of that passion then contributions might not take as big of a hit as they otherwise would.
Although the final tax reform changes are out and the President has signed the bill, it remains to be seen how big of an effect the changes will have on the not-for-profit sector. Not-for-profits and individuals should continue to keep abreast of the changes and discuss potential opportunities with their tax professionals.
