UPDATE – DECEMBER 20, 2017
After approving their own versions of tax reform, the US House and Senate’s Conference Committee worked out the differences between the two versions of the legislation. That final version was approved by both bodies today (December 20).
While there are almost countless changes, the following were key areas we were monitoring, along with the final result on those areas:
|Universal Charitable Deduction provision not included||No such provision||No such provision|
|Eliminated the performing artists’ business deduction||No elimination||No elimination|
|Eliminated the $250 deduction for teacher supplies and instructional materials||Doubled the same provision to $500||No change to current law. The current $250 deduction is maintained.|
|Reduced estate and gift taxes by doubling the exemption and then ultimately fully repealing the estate tax (historically a generator of major charitable gifts)||Reduced estate tax by doubling the exemption||Reduced estate tax by doubling the exemption|
|Repealed the “Johnson Amendment” prohibition on tax-exempt organizations’ support for political campaigns, without causing them to lose tax-exempt status||No elimination||No elimination|
|Repealed lifetime education credits, tax deduction for interest on student loans, and tuition waivers from income for graduate and PhD students||No elimination||No elimination|
|Repealed income tax exemption for private activity bonds, often used to finance cultural infrastructure projects, like museums||No elimination||No elimination|
|No elimination||Removed artists’ housing from the list of “qualified groups” who can benefit from federally subsidized low-income housing||No elimination|
There are just about 30 days left in the legislative year for the US Congress. Their number one issue this season? Tax Reform.
With goals set by House and Senate leadership to have tax reform at least on the floor by the end of the year, time is winding down as there are just about 30 days left in the legislative year for Congress before the Christmas break.
The GOP has put out their tax reform framework and are working on getting it passed in each chamber. Currently, the US House has passed their Budget Resolution (the mechanism they have chosen to get tax reform done – requiring only 50% + 1 to pass), and the Senate is working on their version. Afterwards, they will have to come together to work out the differences between the two.
Federal tax reform impacts every corner of American life. So while there are many areas in which we could focus, we’re choosing to highlight what impact proposed changes in the US Tax Code could have on the nonprofit industry. As tax reform moves through Congress, be on the look out on ways to raise your voice in support of the nonprofit sector.
It’s All About the $$
For nonprofits, the largest impact tax reform could have is on the ability of citizens to donate to their missions, with a tax deduction. That deduction is based on two things: Household Income, and the Standard Deduction level.
Household Income places individuals and families in one of seven tax brackets currently. The new proposal would shrink that down to three levels – 12%, 25%, and 35%. It’s important to note that the proposed framework does not give us an indication as to the threshold amounts of household income for each of the new tax brackets. This helps determine the level at which nonprofits can expect individuals to be able to donate – the total take-home pay for individuals at certain income levels impacts their ability to give obviously. Those donations then are tax-deductible – meaning it lowers their total taxable income.
So for example, if someone is $1,500 over the 12% tax bracket threshold and about to pay 25%, they could donate $1,501 and now be taxed at the lower 12% rate.
So the levels of income set will have an impact on giving. But ultimately, the Charitable Deduction and the Standard Deduction are the driving forces behind giving.
Good news for nonprofits – the charitable deduction seems to be here to stay. The recent proposal includes the charitable deduction as a part of the tax framework. Contrary to previous proposals by presidential candidates and proposals, there is not a signal that a cap would be placed on deductions either.
In fact, on a draft “Postcard Tax Filing” posted by Rep. Jeff Duncan (SC-3) (below), you can see the charitable deduction and mortgage interest deduction staying in place.
Currently, the standard deduction is set at about $6,000 for individuals ($12,000 if filing jointly). This means that if your total deductions (charitable, mortgage interest, etc) is less than $6,000 – you elect to “take the standard deduction” off of your taxable income, and are then taxed at the new number. If your deductions total more than $6,000, you would “itemize” your deductions and provide documentation for donations, interest payments, etc., to prove your deduction – but then you end up with a smaller taxable income number – meaning you pay less taxes.
The incentive for donors in this model is that if you made $50,000 and paid $4,000 in mortgage interest and gave $2,500 in donations, you could get a great tax break because you broke the $6,000 ceiling and would only be taxed for $43,500 in stead of $44,000.
Donations were a tool to get over the standard deduction threshold and reach a lower “taxable income” number, therefore paying less taxes total.
The current proposal would double the standard deduction from $6,000 to $12,000 for individuals. This would have a tremendous impact on the nonprofit sector.
By doubling the standard deduction, donors of a middle class household could lose the incentive to contribute since their normal tax deduction would not lift them over the threshold as in years past. In short, they would take the standard deduction, instead of itemizing. Currently, about 33% of Americans itemize their taxes – doubling the standard deduction would shrink that number down to 5%. In fact, it is estimated that doubling the standard deduction would equal a $13 billion loss in donations to the nonprofit sector nationwide. And that’s not just arts organizations – that includes social services, housing, and even religious organizations.
Universal Charitable Deduction
On Friday, October 6, Rep Walker (R-NC) introduced legislation that moved what is being called the “universal deduction” forward.
The universal deduction would extend the charitable tax deduction to all Americans – regardless if the individual itemizes their taxes or takes the standard deduction. This extension of the charitable deduction makes giving something that all individuals can benefit from instead of only those who itemize their taxes, and would in turn increase giving to the nonprofit sector by $4 billion.
But currently, the bill has a cap placed on the level of charitable giving that qualifies, which could stifle giving for donors.