Insights for Non-Profits

The uncertainty surrounding tax reform in 2017 left many non-profits trying to gauge the impact it would have on charitable giving. With The Tax Cuts and Job Acts passed in late 2017, there is now more clarity on how non-profits, endowments, and foundations will need to adjust fundraising strategies in 2018 to make the most of charitable giving. We outline key changes to the tax code below and how they could impact organizations going forward.

The Standard Deduction

With the standard deduction nearly doubled, fewer people are likely to itemize deductions. Although the deductibility of charitable donations is preserved, this ultimately reduces the tax incentives to give as donors can only deduct charitable gifts if itemized. While this doesn’t mean that Americans will stop giving altogether, there is less financial incentive to do so and, it may limit the charitable deduction to only the wealthiest tax payers.

In 2017, only about 30% of taxpayers elected to itemize deductions, and the Tax Policy Center estimates that number could fall below 10% in 2018 under the new legislation . According to the National Council of Nonprofits, as a result of the higher standard deduction, non-profits will likely see reductions in resources which can result in losses between $13-26 billion in giving each year.

An Increased Limit on Cash Donations

To go with the continued deductibility of charitable donations, there is a new increased limit on charitable deductions to public organizations as a percent of Adjusted Gross Income (AGI). Cash gifts can be deducted up to 60% of AGI in the new tax code, up from 50% previously. This increased limit could mean greater savings for taxpayers who still itemize deductions.

Estate Tax Exemption

The new tax law has doubled the estate tax exemption ($11.2 million per person and $22.4 million per couple), which potentially reduces the incentive to gift to charity within an estate plan. With fewer estates subject to the Federal Estate Tax, there could be a decrease in charitable bequests.

Excise Tax

College endowments will now face a 1.4% excise tax on investment income. This applies to private colleges with at least 500 students enrolled and with assets valued at $500,000 per full-time student. Over the long-term, the reduction in endowment payout will be impacted and the excise tax may make it harder for endowments to preserve its value and support the university’s mission.

While there is potential for endowments and foundations to be adversely impacted by the new tax code, there is a silver lining: though tax reform does reduce certain financial incentive to give, it’s not totally eliminated, and donors’ willingness to give tends to be resilient over time. Additionally, donors may be unsure whether they’re going to itemize this year, so that may result in greater donations in order to exceed the standard deduction.

In light of tax reform, non-profits will need to make a compelling case for support in 2018 and beyond. With potentially less financial appeal and incentive to give, organizations need to shift fundraising efforts to focus on emotional appeal to donors. Stewarding relationships will become increasingly important in this new era of tax reform. Donors should understand how their gift is being used, how it impacts the organization, and why it’s valued.

Consult with an attorney or a tax or financial advisor regarding your specific legal, tax, estate planning, or financial situation.