Nonprofit leaders, fundraisers and donors, themselves, are working hard to understand how the Tax Cuts and Jobs Act of 2017 will affect philanthropy. While there is no clear-cut answer to our questions, there are signals we can take from history and from our own experiences with the factors that inspire charitable giving.
In addition to the larger question of the fate of American philanthropy there are implications of provisions in the legislation that directly and immediately affect certain nonprofit sectors.
While the economy remains a significant factor for charitable giving, the changes to the federal tax code could result in a sharply different outlook for nonprofits this year – and most certainly will require new strategies for sustainable philanthropy.
The following are observations on the Tax Cuts and Jobs Act.
The Standard Deduction
The standard deduction increased to $24,000 for joint filers and $12,000 for individual filers.
- According to a study by the IU Lilly Family School of Philanthropy, this could result in a decrease in giving by $13.1 billion
- The decrease would be roughly half of the decline caused by the Great Recession of 2009, without a clear path for recovery
- This assumes that individuals who do not itemize are less likely to give or will change their giving habits
The Charitable Deduction
The amount of a charitable gift that can be deducted annually was increased to 60% of AGI and the Pease Limitation was repealed.
- Giving by most upper-middle and high-income donors will not be significantly impacted
- Similarly, tax reform will have little impact on individual/household giving by lower-income donors
State and Local Tax (SALT) Deduction
Limit of $10,000 deduction for all state and local taxes combined – previously it was an unlimited number.
- This tax increase for high-tax states, such as New York, New Jersey, Massachusetts and California, could substantially decrease discretionary spending to include gifts to charities
The threshold for triggering an estate, gift or generation-skipping tax was raised to $11.2 million per person ($22.4 million for a married couple).
- In 2010, the estate tax was temporarily repealed and gross charitable bequests dropped 37% from the previous year. The tax returned in 2011, and charitable bequests soared to $14.36 billion.
Private universities and colleges with at least 500 students and assets of $500,000 or more per student are subject to a 1.4% excise tax on investment income.
- Institutions subject to this new excise tax would be forced to either reduce the amount of funds used to support the institutional needs, including student aid, or increase endowment payouts overall
Unrelated Business Income Tax
Tax-exempt entities that are subject to tax on their UBI will be required to segregate their taxable income and loss for each unrelated trade or business activity for purposes of determining their UBIT.
- This could result in significantly higher taxation on UBIT, and therefore create greater tax liability for institutions and reduce funds available for institutional priorities, including operations, scholarships, and mission-related activities
Athletic Seat Licenses
The provision that allows for a charitable deduction for college athletic seating licenses was eliminated.
- Significant reduction in funds available for athletics programs, facilities and scholarships
Now a 20% excise tax on remuneration of the top five employees compensation in excess of $1 million as well as certain large separation payments in relation to historic compensation.
- Tax must be paid by the organization, not the employee
- Serious impact on recruitment, especially for large organizations and those in high-cost-of-living areas
- Increased expenses will pull funds away from mission