Tax overhaul might mean significantly less money for Summit County’s nonprofits and charities
December 20, 2017
On Wednesday, Congress passed the most sweeping overhaul of the U.S. tax code in a generation. The law — which did not receive a single Democrat vote — has been fraught with controversy since its inception. One particular change is worrying nonprofits and charities both locally and nationally: an increase in the standard deduction for individuals and couples that may reduce a major incentive for charitable giving.
Currently, individuals are allowed $6,500 and couples $13,000 as a standard deduction. Under the new tax law, the deduction will almost double to $12,000 for individuals and $24,000 for couples. The law will also eliminate personal exemptions and cap certain itemized deductions such as mortgage interest and state or local taxes.
That potentially means fewer taxpayers will bother with itemized deductions if they amount to less than the standardized deduction, resulting in fewer and smaller contributions to charities. Charities and nonprofits across the country are worried that a once-reliable motivation to give to charity will be rendered moot.
Steve Smith, a financial planner based in Frisco, said charities should be worried about a possible drop in donations. He estimates that the number of taxpayers who will take itemized deductions will be significantly reduced. "Potentially," he said, "we can go from 40 to 45 million people (nationwide) taking itemized deductions down to 10 to 15 million." That could mean billions of dollars in lost donations for charities.
Smith said that the new tax law will diminish a key mission of current tax law: to encourage good deeds. "The tax code, as it is set up, was meant to influence behavior," he explained. Itemizing charitable deductions is one such incentive encouraging people to give to charities in lieu of paying more in tax to the government.
To show how that incentive diminishes, Smith gives an example of a couple in 2017 who received a $10,000 itemized deduction for their mortgage, $10,000 for state and local taxes, and gave $4,000 to charity. That exceeds the current $13,000 deduction, and the rest of the itemized deductions can be applied to their tax bill.
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In 2018, that couple will receive a $24,000 standard deduction, and that's when Smith says the math hurts charities.
"They might say, well hey, we're going to get a $24,000 deduction anyway, there's no point in itemizing that $4,000 to charity since it won't give me any tax benefit." Smith fears that many donors in a similar financial situation will start thinking like that, resulting in the expected drop in contributions.
Smith acknowledges that this theory is an educated guess, and that much of what is coming is unknown. To deal with the uncertainty, Smith and other financial advisors are offering charities and nonprofits advice on how to educate and appeal to donors, such as making donors aware of the change and asking for more charitable donations this year so they can make the most of the tax benefit while it lasts.
The uncertainty is causing concern for local nonprofits and charities. Organizations like the Family & Intercultural Resource Center must contend with short-term needs while also contemplating how to plan ahead for a leaner funding future.
FIRC executive director Tamara Drangstveit acknowledged that changes like these are always cause for concern, but wants to believe that people will still make their regular contributions despite the higher deduction. "I don't think we ever really know how much of charitable giving is motivated by the tax deduction versus philanthropic interest," she said. "We're going to see how it plays out and what the impact really is."
The Summit Foundation executive director Jeanne Bistranin also places a lot of faith in altruistic motivations for donor contributions, but acknowledges how it might change the giving attitude for some donors.
"People mainly give for philanthropic reasons," she said, "but it was nice to have the tax deduction as an incentive for people to give."
Bistranin, like everyone else, can't predict the future and how the changes in the tax code will play out in practice. Nonprofits like The Summit Foundation rely heavily on private contributions. She wants to remain positive, but when nonprofits are already fighting to stay afloat, even a minor dip in contributions is significant.
"We're cautiously optimistic, but dismayed that this went through because of how it might affect contributions," she said.
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