What Non-Profits Need to Know About Trump’s Tax Proposals
In early December, I had the great pleasure of listening to Jeff Kummer, Managing Director of Tax Policy with Deloitte. His presentation to Deloitte alumni addressed changes we can expect based on President Trump’s tax proposals.
With Republic majorities in Congress, and a Republic president in office, the prospects of a federal income tax overhaul are high. Kummer noted that the President and congressional leaders don’t always agree on what the reform will look like. However, he suggested that by overlapping Trump’s tax proposals in the campaign with the House GOP Tax Reform Blueprint and H.R. 1, the 2014 Camp Tax Reform Plan, we have some indication of what might be headed our direction.
For non-profits, there is both good and bad news. The most significant take-away is that non-profits should be planning for more volatility in contributions, especially from major donors.
The Good News about Trump’s Tax Proposals …
There are several positive points in the three tax reform proposals. First, all three proposals plan to retain the charitable contribution deduction for taxpayers who itemize. While the impact is debated, most scholars agree the deduction has a positive impact on contribution size.
Second, all three proposals plan to lower the top income tax brackets. This gives high income earners more discretionary income. Assuming no change in our economic conditions, this should mean that individuals are more able to support non-profit organizations.
Third, all three plans call for a repeal of the estate tax. Without that future tax burden looming, 23.2% of all donors said they would increase charitable giving, while a smaller number (4.6%) said they would give less money to charities.
… And the Bad News About Trump’s Tax Proposals
However, there is some bad news in the tax proposals. All three plans propose a higher standard deduction, which eliminates the giving incentive, at least from a tax perspective, for people who do not make large gifts. In addition, President Trump’s tax proposals also advocate a $200,000 cap on all itemized deductions. In this case, large gifts from major donors would no longer carry a tax benefit, making the out-of-pocket cost to those taxpayers higher.
While most people make charitable contributions because they want to support an organization and not because of the tax benefit, the amount they give is significantly impacted by their sense of financial security. Not surprisingly, the tax-deductibility has significantly greater influence during economic downturns than it does during periods of prosperity. This suggests that the combination of any limitations on deductibility will have an even greater impact during economic downturns.
The Planning Implications
So, what does all of this mean for non-profits and their planning?
Based on what we know so far, tax reforms won’t impact non-profits significantly during economic prosperity. However, when the economy drops into a trough, charitable giving is likely to drop more significantly than it has in the past.
What to Do Now to Prepare
Non-profit organizations can mitigate volatility with effective planning. Here are the three things your current planning should consider in order to make sure your organization is ready:
- Create a healthy financial reserve to get the organization through the next economic downturn. According to the National Bureau of Economic Research, we experience an economic downturn every five years or so, and it lasts about 11 months. Your organization should have reserves that will allow the organization to remain on solid financial footing through the contraction and the first year or so of economic recovery. The best time to plan for economic downturns is when the economy is doing well, as it is now.
- Rethink your fund development pitches. A repeal of the estate tax and any cap on charitable deductions will mean fund development materials will need to be retooled. Short-term and mid-range plans should include funds for developing materials that reflect the new tax realities.
- Reach out to your legislator. The US Tax Code has included a charitable deduction provision since 1917. With the exception of the addition of the standard deduction in 1944, no other change has had such a significant potential impact as the cap included in Trump’s tax proposals. If you are concerned about this erosion of the charitable giving incentive in our tax code, send your legislator a note to let them know.
Want to Learn More?
Here are a few articles I found particularly interesting as I assembled this blog post:
The 2016 US Trust Study of High Net Worth Philanthropy, developed in conjunction with Indiana University. Look for past issues of this bi-annual study and look at how the perceived importance of the tax deduction changes with the country’s economic health.
Compromising the Safety Net: How Limiting Tax Deductions for High-Income Donors Could Undermine Charitable Organizations, by Patrick E. Tolan, Jr.. This is one of the more approachable discussions of the impact of tax policy on charitable giving.
How Tax Law Changes May Impact Charitable Giving, by Laura Kalick, in BDO’s NonProfit Standard. While general, this post gives a few technical details on Trump’s tax proposals.
The Charitable Contribution Deduction: A Historical Review and a Look to the Future, by Vada Waters Lindsey, Marquette University Law School. This article is an excellent analysis, and addresses one of the most frequent sources of criticism: the inequity of the current charitable deduction due to differing tax rates and the standard deduction.
Tax Policy Decisions Ahead: Impact of the 2016 Elections, by Deloitte. A succinct summary of the various proposed changes and possible impacts.
What Do You Think?
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