This Is What You Need to Know about the New Tax Regulations Affecting American Charities

This Is What You Need to Know about the New Tax Regulations Affecting American Charities

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With new tax regulations approved by the Trump administration that could discourage charitable giving, charities may be negatively affected. So far, nonprofits have received less money from fewer donors in 2018 when compared to prior years, a trend that may relate to the tax situation.

The Association of Fundraising Professionals found that the number of donors declined by almost 7 percent in the second quarter of 2018 compared to 2017. During the same period, donor retention rates dropped by a similar amount. Overall, the number of gifts below $250 and above $1,000 have declined along with total charitable revenue. This trend has many individuals in the sector worried.

Anxiety Caused by the Increase in Standard Deductions

The Tax Cuts and Jobs Act signed into law a year ago increased the standard deduction by nearly 100 percent for both individuals and married couples. This means that far fewer people will itemize. Without itemization, individuals have less of an incentive to give to charity.

The Tax Policy Center estimates that the number of people claiming a deduction for charitable giving may decline from 37 million last year to 16 million this year. Wealthier Americans will continue to itemize and receive tax benefits from donations. However, the overall effect is that charities will rely on a shrinking number of donors.

Historically, the fourth quarter of the year has proven the most popular for philanthropic donations. Record numbers were seen last year, perhaps because people were taking advantage of the deduction while they could. This year may see significant declines since there is no longer a rush to balance out taxes.

At the same time, some professionals point out that the new policy actually increases the limit for charitable deductions. Additionally, the American economy has grown since last year, so Americans may continue to donate. A growing concern is that only the wealthy will continue to give, which raises questions regarding power and democracy.

Questions about How the Tax Code Will Impact Giving

An issue caused by the shift in giving away from middle-class donors toward wealthier ones is that these two populations essentially provide support to different types of organizations. Middle-class donors are much more likely to give to religious and social service organizations than their wealthier counterparts.

As a result, the leaders of nonprofits in these areas are particularly worried about the effects of the new tax law and its impact on donor diversity. At a number of organizations, executives have reshaped strategies to attract donors as a response to the potential impact of new tax policies.

In addition, the organizations are lobbying Congress to create a sort of universal charitable deduction. This would allow all taxpayers to deduct their gifts regardless of whether or not they itemize.

The belief that new tax policy will inhibit charitable giving makes the fundamental assumption that individuals donate only to receive a benefit in return. While this may be true in some cases, the inability to itemize may not discourage people from making smaller donations.

Historically, only about 30 percent of all taxpayers have actually itemized, which was always required to take the charitable giving deduction. While the new code is expected to push this number down to about 10 percent, the fact remains that the vast majority of Americans did not before and will not now itemize their taxes.

Changing Strategies for Donation in Light of the New Tax Laws

People who still want to benefit financially from their giving can do so with a bit of planning. For example, moderate donators who make a few gifts throughout the year may want to save up for a few years and then concentrate their giving. That way, itemizing actually produces a larger tax benefit than taking the standard deduction.

Thus, it is possible that donors will simply shift their giving patterns rather than giving less overall. The philanthropy sector may see a surge in the number of donor-advised funds. This financial vehicle allows individuals to see a benefit with giving upfront and decide how to use the money down the line.

Another change that charities may see is an increase in the number stock donations rather than cash. This shift would be due to the tax benefits of offering appreciated stock over the equivalent value in cash.

Individuals can donate stock that has been held for more than a year, at which time the tax deduction is equal to the fair market value of the stock rather than its initial cost. If someone were to sell the stock and pay capital gains taxes, the effective tax rate is higher. The donation would be the value of the stock minus the capital gains rate.

By donating stock, individuals can provide more value to a philanthropic organization while also paying less tax overall. Moreover, stocks can be bunched to push individuals beyond the standard deduction threshold. They can also be donated to donor-advised funds.

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