With the doubling of the standard deduction and the capping of deductions for state and local taxes in the new Tax Cuts and Jobs Act, fewer people will itemize deductions on their federal income tax return. This could be calamitous for charities and other tax-exempt nonprofit organizations, which rely on the deductibility of donations to incentivize contributors. That incentive evaporates for taxpayers who don’t itemize, leading the National Council of Nonprofits to characterize this aspect of the new tax law as “disastrous.”
So, how badly could charitable organizations suffer under the new tax plan?
Bigger deduction, fewer donations?
With the increase of the standard deduction, tax filers will have less inducement to donate to tax-exempt charities and nonprofits. They won’t benefit tax-wise from any contributions if they aren’t able to itemize the donation. The Tax Policy Center estimates that individual giving could decline by between $12 and $20 billion in 2018. People may still give, but they may not give as much. And that adds up.
Donations as political dissent
LGBTQ-related nonprofits are a good example of the trickle-down changes the tax bill could cause – both positively and negatively. The LGBTQ think tank Movement Advancement Project reports that the vast majority of individual donors to LGBTQ organizations gave small donations of less than $1,000. But every donation is significant, and efforts big and small created $230 million in revenue in 2016, with more than 80 percent going to tax-exempt organizations.
While the concern is that these gifts will decrease, the LGBTQ community has seen people step up their support – new donors are giving, and longtime donors are increasing their contributions – because they oppose the policies, including the new tax law, enacted by the Trump administration.
For organizations like Housing Works, a nonprofit in New York City that serves individuals with HIV/AIDS, the most common contributions are not cold hard cash, but rather tax-deductible donations of goods to their thrift stores. The money earned from the sale of these donated items supports the services provided by Housing Works, such as job training, outreach program, and homeless centers.
Without the tax-deductible incentive, people are less likely to sift through their belongings and bag up their unwanted items. Plenty of former givers may just put their used clothing and old household wares in the trash instead of hauling them to the local donation center.
Only time will tell
It would be nice to think that everyone who donates to worthy nonprofits will continue to give, even without a tax break. Presumably, the wealthiest donors will stay the course, as will the most altruistic. But those whose benevolent impulses sometimes need the friendly nudge of a tangible incentive might find themselves re-evaluating the extent of their charitable contributions.
This uncertainty could have been avoided had lawmakers made charitable donations an above-the-line deduction in the new tax code, which would have allowed all taxpayers to claim the deduction without itemizing. But doing so would have reduced federal tax revenues substantially – some estimates put the loss at upwards of $500 billion over 10 years. So, Congress chose to keep charitable donations as itemized deductions, and now we’ll have to wait and see the impact of that decision.