The Tax Cuts and Jobs Act (TCJA) significantly changed the tax benefits of donating to your favorite charity starting in 2018. Now that we’ve seen a full year with the new provisions, not-for-profit organizations are taking a look at the effects on charitable giving.
Tax Law Changes
The deduction for donations increased to 60% of AGI under the TCJA, but the standard deduction nearly doubled to $24,000 for a married couple. Combined with new limits on other itemized deductions, this provision caused millions of taxpayers to file using the standard deduction instead of adding up all tax breaks from mortgage interest payments, state and local taxes and charitable gifts, like they had in the past. The estimated 88% of taxpayers who took the standard deduction in 2018 no longer reap the tax benefits of writing off their donations.
The Impact on Charitable Giving
According to Giving USA, charitable giving declined overall by 1.7%, adjusted for inflation. Individual charitable donations, which made up about 68% of all giving in 2018, declined by an estimated 3.4% last year, adjusted for inflation. Corporate giving also fell an estimated 1.7% after inflation to $427.7 billion. While individual donations account for more than 2/3 of all giving, the increase in donations from foundations helped offset some of the losses.
In 2018, charitable giving amounts declined in many organizational sectors, including religious, education, foundations and public-society benefit organizations. Giving stayed relatively flat in human services, health, arts, culture and humanities organizations. Despite the declines and flat percentages year over year, a few sectors did see increases. International affairs organizations increased by 7%, adjusted for inflation, and environmental and animal organizations saw a 1.2% increase in charitable contributions, adjusted for inflation.
What This Means for Not-for-Profits
Not-for-profits that rely on individual donations will need to find new, more creative ways to incentivize them to continue giving. One way is the use of Donor Advised Funds (“DAF”). DAFs are increasing in popularity and allow donors to use a strategy called “bunching deductions. Donors “bunch” as much as possible in a given year, thereby qualifying for the itemized deductions. Then, on subsequent years, they do not have the same or any deductions, but they still will have the new, higher standard deduction. The charitable giving that goes into the DAF gets distributed to the charities over time in accordance with the donor’s wishes.
Another strategy that works with some older donors is to encourage them to make charitable donations from their Required Minimum Distributions (RMDs) or from their IRA directly to a charity. Some taxpayers prefer this as they are not taxed on these distributions, and the charity still benefits.
Not-for-profits should evaluate their 2019, 2020, and beyond budgets to see if further reductions may be necessary if the giving decline continues.All Insights