What the “Tax Cuts and Jobs Act” Means for Your Organization

Today’s guest blog post is written by Kevin Patterson, Senior Account Executive, PatronManager. 

On December 20, 2017, Congress managed to pass large-scale tax reform, the “Tax Cuts and Jobs Act” (TCJA). While the long-term implications for the economy might not be fully realized for years, the tax bill did alter the landscape for charitable organizations. Now three months into this new world of TCJA, let’s look at what this might mean for your organization.

While there was much lobbying on Capitol Hill, the central policy change that will likely impact non-profits the most is the increase in the standard deduction.

Tax deductions are a way to subtract some expenses that individuals pay from their overall taxable income, resulting in a reduction of their tax bill. The tax code allows for two choices, claim a standard deduction or itemize all expenses to claim a higher deduction. According to the Tax Foundation, approximately 65.8% of tax filers take the standard deduction.

So for the remaining 30.1% who itemize, adjusting the amount of the standard deduction potentially becomes a critical factor — a higher standard deduction would mean less of a need to itemize to gain the same tax benefit. Another important factor is that taxpayers with higher incomes are more likely to itemize deductions. They are also more likely to contribute more of their income to non-profit causes with which they identify and receive the resulting tax benefit.

For the 2017 tax year, the one in which taxpayers are currently filing their taxes, the standard deduction is:

  • $6,350 for single taxpayers or married taxpayers who are filing separate returns
  • $12,700 for married couples filing jointly

The federal income tax system also increases the standard deduction for taxpayers who are age 65 or older.

For 2018, the TCJA effectively doubled the standard deduction for taxpayers to:

  • $12,000 for single taxpayers or married taxpayers who are filing separate returns
  • $24,000 for married couples filing jointly

These new rates make it less likely that a fair percentage of the remaining 30.1% will continue to itemize. Higher income taxpayers might instead claim the new standard deduction. So what does this mean for charitable giving?

There are really two main schools of thought. The first is that with an increase in the standard deduction and the collapsing of income tax brackets, taxpayers will be less incentivized to give because claiming the higher standard deduction will wipe out the tax benefits of making the contribution. The problem with this school of thought is that it essentially lumps every donor into a model that makes them out to be entirely self-centered, motivated by the tax benefit received, and not at all by identifying with the mission or programs of a given non-profit organization. While there may be a few taxpayers who look at their charitable gifts in this way, this school of thought rests on faulty logic.

The second school of thought is that those who make contributions to charitable causes do so because they are engaged in the mission, programming, and outcomes of the non-profit. This altruistic view is more in line with current philanthropic research; see my earlier blog post Because it’s Always Been a Matter of Trust for more information and links to further research.

So, in the final analysis, will the increase in the standard deduction have a large impact on charitable contributions? It depends on the organization. As the research suggests, those organizations that actively engage with their donors have a statistically higher chance of cultivating, retaining, and increasing donations. Instead of focusing on the tax policy, organizations that consistently place the donor at the center of their organization stand to benefit from the increased relationship and minimize any impact to their contributed income.

For more information on how TCJA may impact your organization, please contact your local CPA or auditing firm. A good reference article can be found here, Tax Reform for Nonprofits.

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