Tax law changes expected to reduce charitable giving
New strategies emerging to maximize deductionsMarch 15th, 2018
As the end of tax season looms, financial experts both here and nationally are predicting provisions in the new Tax Cuts and Jobs Act could change how taxpayers plan to contribute to charity this year.
Most agree the changes are likely to alter taxpayers’ giving patterns and lead to a decrease in overall donations, meaning charities and nonprofits might have to adjust accordingly.
“The new tax law did create some changes that have the potential to result in fewer charitable donations,” says Adam Sweet, financial adviser with the Spokane branch of accounting firm Eide Bailly LLP.
Sweet and his colleague Andrew McDirmid say the new tax law made three big changes that have the potential to discourage charitable giving. Those include lowering the individual income tax rates, capping state and local tax deductions at $10,000, and increasing the standard deduction to $12,000 for singles and $24,000 for couples.
“Raising the standard deduction while also limiting itemized deductions will result in fewer taxpayers choosing to itemize,” Sweet explains. “People who previously itemized will likely find the deductions they’d normally take no longer add up to as much as the new standard deduction.”
While he maintains the $10,000 cap on state and local deductions will affect residents of states with high income taxes more than those in Washington, Sweet says it could still influence taxpayer’s decision on whether to itemize.
“Washington has no state income tax, so already it’s harder for those who itemize to reach that new cap of $10,000 on state and local deductions,” he says. “And in order for it to makes sense to itemize, you need to be able to reach an amount that’s greater than the new standard deduction.”
While both Sweet and McDirmid believe that the changes will result in an overall decrease in giving, they say estimating just how large of an impact it will be is a bit more difficult.
“We won’t really be able to determine that until we can compare totals next year,” says McDirmid. “But I think most local taxpayers will continue to donate to charities, because supporting those causes is important to them regardless of whether they’ll be receiving a deduction.”
Anson Avery, accountant and owner of Anson Avery CPA PLLC, says most people who make regular charitable contributions are well-informed and likely already are aware of the tax changes relating to donations.
“Overall, the new tax law will result in a reduction in giving,” he says. “But for many people, nothing will change, because the majority who give are giving in the spirit of good works rather than because they plan to save big on their taxes.”
Avery says with no additional incentive for giving, taxpayers might be more selective about the charities to which they choose to give.
“I think you’ll see a lot more instances of people selling items and keeping the money rather than donating goods,” he says. “People will want to hang onto their cash, rather than make contributions.”
Nationally, the Tax Policy Center, a nonpartisan think tank based in Washington D.C., is estimating the new tax law will shrink the number of households claiming an itemized deduction for their gifts to nonprofits from about 37 million to about 16 million in 2018.
At the same time, the Tax Policy Center estimates the new law also will reduce the federal income tax subsidy for charitable giving by one-third, from about $63 billion to roughly $42 billion.
Sweet asserts, “Congress designed these changes in order simplify the tax process, but as we’re already seeing now, those changes can incentivize other behaviors.”
Sweet says, however, there are several ways in which taxpayers who choose not to itemize can still receive a tax deduction on charitable donations, the most common of which is deciding to bunch donations.
“The idea is that if you donate a set amount each year to charity, you can opt instead to give every three years, effectively bunching your planned donation amount together in order to claim the charitable deduction under the year in which you decide to donate it,” he says.
Of course, Sweet admits, if more taxpayers choose to bunch their donations, charities and nonprofits will have a harder time seeing a constant inflow of cash.
“It will have a definite impact on how charities are able to plan and budget,” he says. “Charitable groups may need to work closely with taxpayers to find ways of making sure they can donate and still have that donation be tax deductible.”
One local organization that’s hoping to help with that is the Inland Northwest Community Foundation, a Spokane-based nonprofit that oversees targeted endowments, local grants, and scholarships.
PJ Watters, the foundation’s director of gift planning, says she believes many local donors or charities aren’t yet aware of how the changes will affect their charitable giving options.
“I think a lot of people will be caught a bit off guard when they go to file their taxes next year,” she says. “But we’re doing everything we can to help people to understand the changes and make them aware of other opportunities for donating.”
Located in 4,900 square feet of space on the sixth floor of the Paulsen Center, at 421 W. Riverside, the foundation currently manages more than 500 funds valued at more than $114 million, which have been established by individuals, families, and businesses.
Watters says one of the first things the foundation did to help educate both donors and charities, has been to put together an informational flyer available on its website and social media accounts.
“We want to work with donors to find the strategy that allows them to continue showing they care, while still providing the opportunity for a tax deduction,” she says. “There are ways they can do it, but donors may need help finding those strategies, which is why we put together the information.”
Bunching through the use of what’s called a donor-advised fund is one of those options listed in the flyer.
Watters describes a donor-advised fund as a charitable-giving account administered by a public charity that manages donations on behalf of organizations, families, or individuals.
“I’d say about 25 to 30 percent of the funds we manage here at the foundation are considered donor-advised funds,” she says. “Donor-advised funds are like a charity checking account, allowing donors to put dollars in and then recommend grants toward their favorite charity.”
Watters says donors receive an immediate tax deduction when they make a charitable contribution to a donor-advised fund. Deductions include up to 60 percent of adjusted gross income for cash gifts and up to 30 percent of AGI for gifts of appreciated securities, mutual funds, real estate and other assets.
She says bunching allows donors to consolidate multiple years of charitable giving into a single year, making it possible to take advantage of the charitable deduction when their bunched gift combined with other eligible expenses exceed the standard deduction.
“As we go forward, donor-advised funds will probably become a more popular option for donors, because they make things a bit simpler,” she says “Putting the money into that fund ensures they only need one receipt for tax purposes, but they’re free to determine later how much they’d like to distribute to which charities.”
Another alternative option listed in the flyer, is the opportunity for donors over the age of 70.5 to make a tax-free donation as part of their required minimum individual retirement account distribution.
“People who are 70.5 years or older who have IRAs, must take a required minimum distribution,” Watters says. “Qualified charitable distributions can be made directly from the IRA to a charity, which reduces the donor’s taxable income and potentially their overall tax bill.”
Watters says donor-advised funds are prohibited from accepting such distributions, but donors can still contribute those dollars toward existing designated agency funds, or create one that matches their philanthropic goals.
She says of the 500 funds managed by INWCF, about 100 are agency funds, created by nonprofit organizations in order to benefit them directly.
“Donors can be sure that when they support a designated fund, that money goes directly back to support the needs of the agency that started it,” she says. “We also have many donors who choose to create their own fund to benefit only their selected charities, and those can be set up to donate automatically on their behalf.”
Like Sweet, Watters says that with more taxpayers looking to take advantage of alternative donating options, charities and nonprofits also will need to begin planning accordingly.
“If more donors aren’t inclined to give annually, larger gifts will be coming in less often, and charities will have to develop support and strategies for how to manage without them,” she says. “We want to educate donors on their options, but we also want to make sure charities aren’t caught unprepared either.”
As part of its effort to continue educating donors and charities, Watters says INWCF plans to host a series of three round-table discussions in Pullman, Spokane, and Coeur d’Alene, starting next month.
“These discussions are designed mostly for attorneys, CPAs, investment managers, and others working in the charitable arena, but we’re happy to extend an invitation to others,” she says.
Watters says she’s optimistic that donors who regularly give to charities will continue to find ways of doing so, regardless of whether they receive a deduction for doing so.
“We know people don’t give because of deductions, rather they give because they care,” she says. “Deductions will influence how much they give and when, but the caring factor won’t change.”