There are a lot of changes in the wind this year because of the Tax Cut and Jobs Act of 2017 (TCJA). Donors and nonprofits alike should be aware of several implications as we enter the fourth quarter of the year.
Many are fearful that with the increase in the standard deduction for a married couple to $24,000 per year, many taxpayers who previously itemized their charitable contributions will no longer do so, taking the standard deduction instead. This could potentially impact national and global charitable giving this year and in the future. In addition to the risk of declining donations, nonprofit organizations also face increased volatility in revenue from donors.
The deduction for charitable giving is limited to a certain percentage of income, based on the nature of the gift made and the type of organization receiving the gift. The good news is that the charitable deduction income limitation has increased from 50% to 60%. The bad news is that this increased limitation applies only to cash gifts – not real property, nor appreciated assets. For all other contributions, the 50% deduction limits are un-changed.
The good news on the horizon, especially for those who have a donor advised fund, is a new concept called “bunching”. For donors who can contribute more than the $24,000 standard deduction limitation into their fund, they can deduct up to 60% of their AGI for a cash gift and up to 50% of their AGI for most other gifts like appreciated stock and real property. When individual donors “bunch” charitable donations, they combine several years of “normal” annual charitable contributions into a single year. In the bunch years, the larger charitable contributions, in combination with other itemized deductions that cannot be timed this way — like mortgage interest and SALT taxes — will increase the likelihood of exceeding the standard deduction and thus provide the donors with additional tax savings.
Although “bunching” may be an effective planning tool for an individual taxpayer, it can cause significant planning issues for nonprofit organizations that rely on donations. For example, if a donor reduces his contributions in 2018 and 2019 and then bunches contributions in 2020, the nonprofits he supports will experience revenue shortfalls for two consecutive years, followed by revenue surpluses in 2020, as a direct result of his tax planning. Alternatively, if the donor decides to bunch contributions in 2018 and reduce giving in 2019 and 2020, nonprofits may experience a (perhaps surprising) revenue surplus followed by a shortfall.
Nonprofit organizations can prepare for the new tax act in several ways. First, they can consider adopting a multiyear budget, which incorporates predicted volatility in revenue and allows long-term planning. Creating or building upon organizational endowments is another way to prepare for the future volatility described above.
Second, nonprofits must improve communication with their donors. They can explain the uncertainty they face under the new tax law, and how bunching can be mutually beneficial for donors and nonprofits. The importance of the relationship between donors and nonprofits cannot be underestimated.
Finally, internal preparation in the nonprofits is fundamental. Using the available data that all nonprofits gather about donor behavior – for example, size of past donations, consistency of donations, and if they have been consistent donors- will inform the nonprofits and will help them determine the donor’s level of commitment to the organization’s mission and perhaps better understand patterns of giving.
To summarize, we recommend working with your tax professional in a timely manner so as to time your charitable contributions accordingly.