Federal Tax Reform Impact on Nonprofits

May 8, 2018


When the federal tax reform takes full effect, a majority of the people who have itemized their federal tax returns won’t anymore because of the increase in standard deductions.

This has charities worried that donations could decline because those taxpayers won’t be able to get a tax write-off any more for that philanthropy.

Charitable giving incentives are not 100% of the solution, but people give more when there are incentives. When that tax break isn’t available, typically the amount people give is less.

The national estimates are that charitable giving will decline by between $12 billion and $20 billion in 2018, or between 4% and 6.5% as a result in of the increase in the standard deduction and the decrease in the number of taxpayers who itemize their federal taxes.

In addition, the exemption for the estate tax doubled under the tax reform bill, meaning that the wealthy can pass on more of their riches to their heirs without tax implications. Predictions are that this will reduce the incentives for the wealthy to make charitable contributions, and could end up reducing philanthropic bequests by between 15% and 30% nationally, or roughly $4 billion.

That puts nonprofits in a challenging position at a time when they’re expected to do more as government subsidies  and services decline.

The federal tax reform passed doubling the standard deductions to $12,000 for individuals and $24,000 for couples, The number of people who itemize is expected to drop to about 10%.

That means the filer won’t be able to write off charitable contributions, leaving a question about whether people will stop making or reduce the donations they make to charitable organizations. Taxpayers who continue to itemize their federal returns will still be able to get a tax break from their charitable donations.

With the tax changes still so fresh, many charities still are trying to determine what the impact will be.  Plan to add funding diversification to mitigate the likely reduction to charitable giving.