Posted February 22, 2018
In December 2017, the U.S. Congress passed and President Trump signed into law a new tax law for American businesses and individual taxpayers. This new law is vast and complicated, so we think it is best to break it down into manageable subject areas rather than summarize the whole thing all at once. We chose charitable contributions as the first relevant subject area.
A Major Disruption for U.S. Non-Profits
The U.S. Federal Tax Code for individuals makes a distinction between the standard deduction and itemized deductions on Schedule A. Taxpayers must choose one or the other (not both), and the criterion for choosing is which one will provide the most tax savings. The new tax law nearly doubles the standard deduction for 2018 up to $24,000 for couples filing jointly and up to $12,000 for individuals. With these increases for the standard deduction, millions of taxpayers will no longer itemize deductions (including charitable contributions) because the standard deduction will save them more in taxes. This change will be a major disruption for U.S. non-profits, as many donors will no longer receive a tax savings for their contributions. The Urban-Brookings Tax Policy Center estimates that the number of tax returns claiming deductions for charitable contributions will drop by 50% for 2018.
For example, Fred and Ginger usually donate $10,000 per year to charities. They do not have a mortgage, but they do deduct $10,000 in state and local taxes, so their total itemized deductions come to $20,000. In 2017, their joint standard deduction was only $12,700 so it benefits them to forgo the standard deduction and itemize $20,000 in deductions on Schedule A. For 2018 however, they will want to take the standard deduction of $24,000 because it exceeds the $20,000 they would itemize. This means that they won’t get a specific tax benefit for giving to charity in 2018 unless they increase their giving so their itemized deductions exceed $24,000.
A Solution for Donors
Instead of making a consistent gift every year, donors can bunch their gifts every few years to exceed the higher standard deduction. Fred and Ginger could donate $20,000 every other year and itemize along with their state and local deduction to bring their itemized total to $30,000. They could itemize in the years when they bunch their donations and take the standard deduction when they do not.
It remains to be seen how many donors will stop or cut their donations because they no longer can claim a tax deduction. And it remains to be seen how this will affect non-profits if giving declines and if gifts become less consistent due to the bunching strategy.
Source: Wall Street Journal 2/14/2018
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