The Tax Cuts and Jobs Act of 2017 (“the TCJA”) is now law and most of the provisions became effective January 1, 2018. And while the TCJA is focused on economic stimulation, there are going to be certain effects on nonprofit organizations.
The biggest (and most publicized) effect on nonprofits is the anticipated decrease in donations resulting from the increase in the standard deduction on personal tax returns. In 2017, the standard deduction was $6,350 for single taxpayers and $12,700 for married couples filing jointly. Under the TCJA, those amounts increase to $12,000 for single taxpayers and $24,000 for married couples.
The Internal Revenue Service says about 30% of taxpayers currently itemize their deductions. This number is expected to decrease significantly. Two of the effects of this change are:
- Many middle-income taxpayers will not see a tax benefit from charitable contributions, and
- Some middle-income taxpayers accelerated what would have been 2018 contributions into 2017 to get a tax benefit.
A study conducted by Indiana University (commissioned by the Independent Sector) predicts donations to nonprofits will fall by at least $13 billion, or about 4.5% in 2018. But some contributors say donors don’t necessarily give for the tax benefits, but because of the outcomes of the nonprofits they support. In any event, nonprofits should plan for a potential reduction in contributions.
Individual taxpayers that have a significant amount of itemized deductions (over the $12,000/$24,000 threshold) will continue to get a tax benefit from making charitable contributions. Not surprisingly, those with significant amounts of itemized deductions tend to be high-income taxpayers. According to the study referenced above, high-income taxpayers tend to make donations to colleges, museums, and arts organizations, while smaller donors tend to contribute to social service organizations and religious organizations.
Additionally, going forward, some taxpayers may choose to “bunch” their contributions into certain tax years. This means the taxpayer would skip donating in one year (when itemizing is not beneficial), then double up the next year, when itemizing is beneficial.
There are a variety of other effects of the TCJA, including impacts on the Unrelated Business Income Tax (“UBIT”). Those organizations with UBIT will be taxed at a flat rate of 21%. And there are limitations on the use of UBIT tax loss carryovers. Watch our website for additional UBIT information coming soon.
Another interesting change in the law is that funds in “529 Accounts” can now be used for secondary and elementary school tuition and related expenses up to $10,000 per year. A 529 Account is funded to save for a student’s future tuition and other school expenses. Gains related to amounts deposited are not taxed if withdrawn funds are used for qualified purposes. Under the old tax rules, this benefit was only available for college tuition and certain other college expenses.
For more information, please contact, Audit Partner, Ray Holmdahl.