NEW TAX REFORM LEGISLATION AND CHARITABLE GIVING: A BIT MORE DETAIL

In the sprint to pass tax reform by the end of the year, Congress has unfortunately delivered a major blow to our nation’s nonprofit sector and the communities it serves.

The tax reform bill signed into law provoked a spirited debate about whether the middle class or the wealthy would be the main beneficiaries of the first comprehensive tax reform for over three decades. Ancillary debates broke out over the ability to deduct taxes paid to state and local government and the interest paid on mortgages.

Lost in the political shuffle, however, were two aspects of the bill that represent a direct hit on churches and other nonprofits and the communties they serve.

The first issue is the charitable deduction itself.

By doubling the standard deduction, estimates are that between 90-95 percent of filers will not itemize their returns, thus walling off the charitable deduction from all but 5-10 percent of filers.

The Tax Policy Center estimates this change will reduce charitable giving by up to $20 billion a year.

According to Independent Sector, this is roughly the equivalent of losing all charitable giving in Vermont, North Dakota, Alaska, South Dakota, Maine, Wyoming, Rhode Island, Delaware, Montana, West Virginia, New Hampshire, Hawaii, New Mexico, Idaho, Nebraska, Nevada, Arkansas, Mississippi and Kansas combined. 

A recent study by George Washington University concluded that this new law will result in a loss of at least 220,000 non-profit sector jobs.

The new law also more than doubles the size of estates that will be subject to the federal estate tax, to over $22 million. Reducing the number of estates subject to the estate tax will hurt our country’s communities in a significant way.

The biggest casualty will be charitable giving. 

Currently only 1 in 500 estates are large enough to be taxed. That number will drop significantly under the reformed tax code.

The estate tax creates a strong incentive for the super-wealthy to give to charity rather than pay the tax. Eliminating that incentive for many more estates will cause a substantial decline in very large gifts: the kind that can be truly crtical for charities, colleges, hospitals and the arts.

The best evidence comes from the one recent year (2010) during which the estate tax was not in force: charitable bequests dropped by 37 percent from the previous year (2009), and then rose by 92 percent in the following year (2011) when the estate tax was restored.

Pastors need to be aware of the possible impact the tax reform legislation may have upon the contributions they have received in the past.

Already, there have been a number of initiatives aimed at making the charitable deduction universal, so that all filers, including non-itemizers, can utilize this provision of the tax code.

We shall see if Congress has the political will  to work in a bi-partisan way to support the churches and charities which are so essential to our country and our communities.