The New Nonprofit Tax Laws for Dummies, Part 2
What’s changed about the itemized deduction though? The biggest one that has left taxpayers “salty” is the capping of the State and Local Tax (SALT) deduction at $10,000. To an 8-year-old, $10,000 probably seems like a fortune; after all, imagine the amount of video games one could buy with that! To bring it back to the analogy though, we can illustrate that it isn’t good for itemizers at all.
Imagine that Mom had one chore in particular for you that happened a lot—let’s say it was washing the dishes. That means that the more you washed dishes, which happened far more often than any other chore, the more money you would get to keep for yourself—it would be a cash cow! What would happen, though, if they decided to limit the amount of dollars you could get from that chore? Why, you’d probably be more likely to take the standard deduction, because now, there’s less of a chance that you’ll make it to over its newly increased amount!
This is a pretty big deal for us, because if you can recall, you can combine chores/deductions to bring up the amount you save. Among those is the charity write off, but it has to be noted that according to the Tax Foundation, “... in tax year 2014, more than 95 percent of all itemizers and 28 percent of all federal income tax filers took a deduction for [SALT].” So what? Well, since SALT got capped and the standard deduction got bumped up, that means that less people will be itemizing, which will make it less likely that someone has to donate to charity to shore up their taxable income.
Other than the SALT changes, the other big ones are a reduction in mortgage interest write-offs—you can now only deduct interest payments from the first $750,000 of your mortgage—but, more importantly, for us non-profiteers, the percentage of gross income for charitable contributions has been raised from 50 percent to 60 percent. According to H&R Block, this is particularly exciting, as “for the 2015 tax year, 82 percent of taxpayers who itemize claimed a charitable contribution.”
Now, with that Tax Accounting 101 lesson out of the way, we can really get into it: How does all of this affect us in the nonprofit field?
While it’s looking great for taxpayers that aren’t in tax-happy states, it won’t be too good for nonprofits. Because the standard deduction was increased by so much and the main reason to itemize was capped, it’s projected that 90 percent to 95 percent of all filers will chose the former method, whereas in years past (as mentioned above), that percentage was a little over 70. Because of this, the Tax Policy Center estimates that giving will drop anywhere between $12 and $20 billion. It’s important to recognize though, that this is estimating that income trends remain stagnant at their 2017 levels, and even then, it’s—I’m not going to say only, because it’s still quite sizable—a 6 percent decrease at its most.
Additionally, when combined with the changes to the estate tax that decrease the number of estates that are eligible to be taxed (Surprise! More changes!), we could potentially be looking at a drop of another $4 billion.
Is that it for us then? Are we just supposed to grit our teeth and bare the impact of losing billions of life-saving and, more importantly for us, job-saving dollars? Not quite. As I’ve written previously, nonprofits have long needed to reevaluate the way they market their fundraising attempts.
While we can’t deny that many donate to charity simply to get tax breaks, it is scientifically proven that people are much more compelled by feelings than they are finances. This tax plan isn’t a catastrophe, but rather, we must turn it into a catalyst for nonprofits to remember what they are—problem solvers that fix with compassion, not money chasers who see potential donors as money pinatas, where the more you beat and barrage them, the more they give you. I hate to end this little motivational speech on a joke—I’m just kidding, I relish the opportunity—but when the federal government gives you lemons, well, the 8-year old in all of us knows just what they need to do.
Click here to read part 1.
Moshe Hecht, winner of the 2017 NonProfit PRO Technology Professional of the Year, is a philanthropy futurist, public speaker and chief innovation officer of Charidy, a crowdfunding platform and consulting company that has helped 3,000 organizations raise over $700 million.
Moshe's passion lies at the intersection of technology and charitable giving. When Moshe is not at the office, he is writing music and enjoying downtime with his wife and three redheaded children.