The New Tax Law—how will it affect your donors?
Joan M. Renner, CPA, CGMA, Shareholder, Renner and Company, CPA, P.C.
We’re starting 2018 with sweeping tax changes that bring nonprofits some good news and some news that’s not-so-good, about how the new tax law affects donors.
How it will affect your nonprofit will depend on your donors, and maybe how well you know them. Here’s a summary of some of the changes related to charitable contributions. Now is a great time to review and renew.
Deducting Contributions–Good News
Individuals who itemize, will still get a tax deduction for their charitable contributions.
Deducting Contributions–Not-So-Good News
Fewer individuals will itemize their deductions in 2018 when the standard deduction increases to $24,400 on a joint return ($12,200 for single). Donors in high-priced real estate markets who pay a lot for mortgage interest and real estate taxes will still be itemizing. So will donors living in retirement communities whose fees include medical expenses. These individuals will still have a tax incentive to give.
Donors who don’t have high mortgage interest, real estate taxes and medical expenses will no longer need to itemize their deductions. They’ll get a $24,400 standard deduction (or $12,200 for single) no matter what they give to charity. How well do you know your donors?
Strategy–Tell your story.
Donors of smaller contributions may not be tax-driven in the future. These donors will need to hear more about your unique mission-related impact. Review and renew how you’re telling your story.
Younger donors may be more cause-driven anyway. Attendees at our 501(c)(fit!) financial leadership training seminar for emerging nonprofit leaders reported that millennials are more motivated to give in response to your story than their tax deduction.
Planned Gifts–Good News
Planned giving donations will still generate tax deductions for those who itemize. Under the old law, donors could only deduct contributions of up to 50% of their income. The rest carries forward to future years, but this limit made deducting planned gifts difficult for people whose income consisted mainly of tax-exempt bonds. The new tax law increases the limit to allow donors to deduct contributions of up to 60% of their income to certain charities.
Planned Gifts–Not-So-Good News
Not every charity qualifies for the 60% limit. Qualifying charities do include churches, tax-exempt schools, hospitals, governments and public charities. Capital gain property does not qualify for the 60% limit. A lower 30% limit is available. There’s more to know about this, so consult your tax advisor if you’d like to know more.
Strategy— Bypass the above limit altogether. Help your donors use the Qualified Charitable Distribution! Read more below.
Gifts from an IRA–Good News
Donors who are age 70 ½ can still make a tax free Qualified Charitable Distribution directly from their IRA for up to $100,000, completely bypassing the above income limitation, and still taking the full standard deduction. Of course the contribution isn’t eligible to be included in itemized deductions but it’s excluded from income so it’s even. Even better, the distribution counts toward the donor’s RMD. (Required Minimum Distribution from an IRA for people age 70 ½).
Gifts from an IRA–Not-So-Good News
A lot of people don’t know about the Qualified Charitable Distribution. Consult your tax advisor if you’d like to know more.
Strategy–Help donors give from their IRA. If your donors are age 70 ½, chances are they are taking taxable IRA distributions and then taking a limited itemized deduction for their donation to your organization. Get your tax advisor to write up a statement your donors can use to authorize a Qualified Charitable Distribution, directly from their IRA to your charity. Everyone wins.
Corporate Donations—Not-So-Good News
Corporate tax rates are going down, reducing the tax incentive for corporate donations.
Corporate Donations—Good News
Corporate charitable contributions have always been limited to 10% of corporate net income. Many of your corporate donors have already handled their tax planning through their charitable foundations. They’re more interested in corporate responsibility and community service. The lower corporate tax rate may not affect their primary motivation for giving to your organization.
Strategy–Maximize visibility for your corporate donors. They’re not giving for the tax deduction anyway.
There are a lot of details that go along with these basic points. As always, check with your tax advisor about your specific facts and circumstances.
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