Tax Reform’s Effects on Philanthropy: What to Consider and How to Move Forward

Read Time: 3 minutes

Tax-Reform.jpgCo-authored by Vice President Adam Wilhelm

Congress passed a major tax reform bill on Wednesday, December 20th—including many provisions that could impact nonprofit organizations. Nonpartisan analysts have projected that the bill may cause charitable giving to drop by as much as $20 billion in 2018.[1]

As the sector regroups, what high-level information do all leaders need to understand, and how can fundraisers prepare for the weeks ahead? To help organizations plan their next course of action, Campbell & Company put together a primer on the standard deduction and estate tax changes, along with key recommendations for development staff.

Standard Deduction: Possible Impacts on Low- to Mid-Level Giving

The bill nearly doubles the standard deduction from $6,500 to $12,000 for singles and $13,000 to $24,000 for couples. As a result, the increased deduction incentivizes more than 30 million additional taxpayers to take the standard deduction instead of itemizing their charitable gifts.[2]

This will likely create an impact at the middle and lower end of the donor pool. The Tax Policy Center estimates that the number of taxpayers who choose to itemize could decrease by 75 percent in 2018.[3] Additionally, for families and individuals who continue to itemize, the bill’s lower tax rates will make deductions less valuable next year. These standard deduction changes will expire in 2026.

Estate and Gift Tax Exemption: Less Incentive for High-Net-Worth Donors

For 2018, the estate tax exemption is $5.6 million per individual and $11.2 million for married couples. The tax reform proposal will temporarily double the estate tax exemption, allowing an individual to transfer approximately $11 million to heirs without being subject to the estate tax, which is currently 40 percent. In 2026, the estate tax exemption will revert to its current levels.

For more details on the tax bill’s effects on philanthropy, visit the Independent Sector website.

Looking Ahead: Advice for Nonprofit Staff and Volunteers

Tax-Reform-Callout.pngThe following recommendations can serve as a guide as organizations wrap up end-of-year appeals and nonprofit leaders react to the tax overhaul.

  • Be ready to speak with donors and your peers about the effects of tax reform.
  • Encourage donors to give before the end of the calendar year. Contributions will likely carry greater value to the donor in 2017 than they will in 2018 because many taxpayers will be pushed into a lower tax bracket.
  • Talk to donors about combining two years of giving into one to get them over the increased standard deduction threshold.
  • Advise donors to give from their IRAs if they are taking required minimum distribution.
  • Be prepared for donors who may decide to start a donor-advised fund so they can deduct the full gift this year but distribute the money to nonprofit organizations over time.
  • As always, encourage each donor to review any financial decisions with their advisors.

Remember, context is important: while a reduction of $20 billion is substantial, total giving in the US will likely approach or exceed $400 billion in 2017. Additionally, the charitable deduction is an important piece of the giving puzzle, but it does not rank as one the top three motivators for philanthropic giving in most studies.[4] Continue to cultivate meaningful relationships with donors and focus on the many reasons supporters give that reach far beyond tax incentives.

If you have questions on tax reform that we did not cover, please leave them in the comments below.

[1] The House Tax Bill Is Not Very Charitable to Nonprofits, TaxVox

[2] The Republican tax plan will make it more expensive to donate to your church, The Washington Post

[3] Distributional Analysis of the Tax Cuts and Jobs Act as Passed by the House Ways and Means Committee, Tax Policy Center

[4] The 2014 U.S. Trust Study of High Net Worth Philanthropy, U.S. Trust and the Lilly Family School of Philanthropy

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Caitlin Bristow

Caitlin Bristow is a Senior Consultant at Campbell & Company. A leader of our Higher Education practice and alumni engagement work, she partners with nonprofits across sectors to help them build philanthropic support and deepen donor relationships.