Knowing the best steps to take in order to secure your nonprofit’s longevity can be daunting in an ever-changing tax reform landscape. Many nonprofit organizations fear that they will lose donors in the long run if the federal tax incentive for their charitable giving is reduced or nullified for taxpayers. However, there are steps you can take in both the short and long term to help you receive more donations before year-end. This issue of Nonprofit Advisor outlines the best ways for your donors to navigate charitable giving options. It also highlights how the Trump administration/GOP's "September Framework" and both tax plans introduced by the House of Representatives and Senate can impact your year-end strategy.
1. Solicit noncash contributions: In certain circumstances, the donor can take a deduction using the fair market value (“FMV”) at the time of the contribution rather than the cost basis of properties that have been held for more than one year. The donor can avoid paying federal capital gains tax on the appreciation in value of the noncash item(s). Establishing FMV of a charitable contribution of real estate, stock, or financial instruments is generally not an issue for a taxpayer due to the availability of appraisals and market quotes. However, most taxpayers have problems placing a value on clothing and other household items gifted to charity. The burden of establishing FMV is on the taxpayer. If your organization collects and relies on everyday household items, encourage donors to clear out their homes for the holidays. Noncash donations of $5,000 or less do not require an appraisal, nor do publicly traded securities of any value. When it comes to cars and other tangible personal property however; there are additional rules that could limit the application of these provisions.
2. Qualified Charitable Contributions: Individuals 70-1/2 years and older can distribute otherwise taxable traditional amounts directly to certain tax-exempt organizations. These distributions are known as qualified charitable distributions. They are federal income tax-free to the donor and no charitable deduction is allowed. Qualified charitable distributions can provide tax savings. Under the current law, this can help wealthy individuals lower their adjusted gross income, which in turn increases the value of their itemized deductions. Additionally, this mechanism can appeal to wealthy individuals who don’t rely on their required minimum distributions from their retirement plans to cover their living expenses.
3. Charge it. Encourage donors to use their credit cards. Contributions charged to a credit card are deductible in the year the charge is made, even though it may not be paid by the donor until the following year.
4. Map out a long term giving structure. If a donor’s planned charitable contribution is limited to a percentage of his/her adjusted gross income in a given year, consider structuring a large donation over multiple years. Be prepared to work with the donor and his/her tax advisor.
Following the release of the Trump administration/GOP’s “September Framework,” which outlined tax reform, on November 2 the House of Representatives released the “Tax Cuts and Jobs Act.” Two primary takeaways for the nonprofit sector are:
- In the short term, charitable organizations should encourage donors to take advantage of the existing tax laws by accelerating charitable giving intended for 2018 into the 2017 tax year, and;
- In the long term, there will be a greater challenge for nonprofits if more donors lose the federal tax incentive for their charitable giving.
Prior to any tax reform passing, there could be many changes to the provisions in the proposed legislation. However, as of this article’s date, the Tax Cuts and Jobs Act and the newly released Senate tax plan provide insight as to possible changes occurring in this tax reform. Most of the provisions would be for tax years beginning after December 31, 2017. It appears that the planning provisions discussed above will remain for the 2017 tax year. Notably, the act proposes a modification of the limits for charitable contribution deductions in a given year. Here are five top-level aspects of the reform that can directly impact your nonprofit:
1. On the surface, the act proposes an increase in the 50% limitation for cash contributions to public charities to 60%.
- However, there are provisions that pose challenges to nonprofits. The tax plans could ultimately reduce or eliminate the tax benefits of charitable contributions to many donors.
2. The framework calls for almost doubling the standard deduction. Current law provides $12,700 for married filing jointly (MFJ) and $6,350 for single filers. Under the House’s plan the standard deduction would increase to $24,400 for MFJ and $12,200 for single filers. The Senate version is similar.
3. While still under debate, the framework also proposes the elimination of most itemized deductions with the exception of mortgage interest (subject to additional limitations), charitable contributions, and real estate taxes (limited to $10,000 for the House Plan). The Senate plan calls for the elimination of the real estate tax itemized deduction.
4. Under these provisions, many taxpayers could end up using the higher standard deduction rather than the itemized deduction, therefore losing the tax benefit of a charitable contribution deduction.
5. The Federal estate tax exemption would increase by almost $5 million to approximately $11.2 million (depending on inflationary adjustments). This means a married couple could transfer over $22 million from their estate free of any federal estate taxes. At the time of this article, the estate tax is subject to a permanent repeal in 2024 under the House plan. This could impact the motivation for wealthy taxpayers to incorporate charitable bequests in their estate planning.
As changes to tax reform continue to unfold, we will keep you informed of the ways in which it may effect your nonprofit donor base. In the meantime, please reach out to your Friedman LLP advisors for questions on your year-end tax planning.
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