Donors and Changes to the US Tax Code
By David M. Reff
The change in the US Tax Code has brought many challenges to United States taxpayers and nonprofits. This article is about practical actions that can be taken as well as understanding the changes that will impact both donors and nonprofit charities.
It surprises me as a practicing Certified Public Accountant how many people I run into that think that charitable donations are no longer deductible for anyone. They are still deductible, but only if the taxpayer (donor) has enough deductions so that their itemized deductions exceed their standard deduction. Before the change in the tax law approximately 30% of all taxpayers itemize their deductions as opposed to taking the standard deduction. Depending on the study you are looking at it is estimated that only between 4% and 10% of all taxpayers will now itemize their deductions.
The standard deduction now ranges from $12,000 for a single taxpayer under age 65 to $26,600 for a married couple that are both 65 or older. All taxpayers are generally limited to $10,000 of state and local taxes, commonly referred to as SALT. Besides the SALT deduction there are basically two categories of itemized deductions left, medical expenses in excess of 7½ % of the taxpayers adjusted gross income (AGI) and qualified mortgage interest. Assuming your donor is a high-income taxpayer that pays over $10,000 in state and local taxes, has no mortgage interest deduction or allowable medical expenses the first $2,000 of charitable donations would not be tax deductible to them assuming they are a single taxpayer under age 65. If they are a married couple both over 65 the first $16,600 of charitable donations would not be tax deductible to them under the same scenario.
In my accounting practice the item that seems to be driving force if my clients will be itemizing for 2018 or not is if they still have a home mortgage. Surprisingly there are older people of means that still have mortgages, so one should not make any assumptions as to who will be itemizing and who will not be.
I am only going to discuss four practical actions from a tax point of view. I am not going to discuss donor relations in general; it is certainly also a subject that is more important than ever because of the new tax law, however there are others much more qualified to discuss it.
The first action is to educate your donors over age 70½ that if they have a taxable IRA they can have their IRA trustee make their distribution checks out to charities up to the amount of their required minimum distribution (RMD), not to exceed $100,000. The taxpayer does not have to report this amount as income.
The second action is encouraging your donors that don’t have enough deductions to itemize to group their donations in certain years so that they are able to get some tax benefits in some years. There are many ways to encourage this. For member based organizations such as synagogues, put into place a multi-year membership and easily allow your members to pay dues for more than one year at a time. Consider when talking to donors that in the past you would asked for a large donation payable over multiple years that it actually may make more sense for them to pay it all in one year.
Another way for your donors to group their donations is through the use of a donor advised fund. Most of the Jewish community foundations have these funds. In Los Angeles we have the Jewish Community Foundation of Los Angeles, New York City has the Jewish Communal Fund, even in New Mexico you can set up a donor advised fund with a local fund, the Jewish Community Foundation of New Mexico. I personally encourage my clients to check with their local community foundation first when setting up a donor advised fund as the profit of the advisor will end up in their community instead of a for profit advisor. Most investment firms also have donor advised funds.
The third action is to ramp up your legacy/planned giving program. From a donor point of view my favorite is naming a charity as a beneficiary or contingent beneficiary of a taxable retirement such as an IRA or 401K. No trip or bill from the attorney to change their will or trust, merely a form to fill out with the trustee of the retirement plan. This is money that their beneficiaries would have to pay income taxes on if they received it. It may also relieve the donor of the worry that they heirs won’t receive enough money when they die because this is in a separate pot than their house and other assets.
The fourth action item is to continue convincing your donors that your mission is still more important than ever. Even though the government might not be subsidizing their donation they probably received a tax decrease under the new law so there is no need for them to reduce their support.
Time will tell what the change in the tax law really has done for charitable donations. In the mean time we need to keep talking to our donors and helping them understand the best strategies available.
David M. Reff is a Certified Public Accountant and a past president and treasurer of Temple Beth Hillel in Valley Village, CA.