Finding “lemonade” in the new tax law
By Lynn Sygiel, editor, Charitable Advisors
When the Tax Cut Jobs Act (TCJA) of 2017 passed Congress in December, many news stories focused on the concerns of nonprofits about the potential impact on individual charitable giving.
Under the new law, the standard deductions increased dramatically to $12,000 for single filers and $24,000 for married couples filing jointly. The increase, coupled with the reduction or elimination of other itemized deductions, raised fears that many taxpayers who previously itemized and claimed charitable deductions, might claim the standard deduction instead and forgo making donations.
But Professor Russell James III, who teaches graduate courses in charitable giving at Texas Tech University, believes there are other ways to look at the law’s effect that suggest making lemonade out of lemons.
While James knows it will take some time to determine how the law will impact nonprofits’ bottom lines, he said that most articles haven’t told the more complicated story about where nonprofits might focus their energies.
In the past, researchers would estimate, and then wait a couple of years when hard tax data was used to compare reality with their estimates. The problem the law presents is that it is assumed fewer people will itemize, resulting in less hard data.
“Because we’ve lost those itemizers, it’s going to be a crazy long time before we really can be confident about the impact of these policy changes,” said the Department of Personal Financial Planning professor who wrote his dissertation on charitable giving at the University of Missouri.
While nonprofits will have to wait and see for the results for mid-level donors, here’s where the lemonade comes in. James’ advice for development departments is that there are some benefits to the new tax law particularly in the estate-giving and planned-giving space.
“There is a lot of focus on the negative impact for the mid-level donor group. However, these are people who weren’t itemizing last year are not going to be itemizing this year,” James said.
“If we move beyond the mid-level donor and look at the top 10 percent wealth group, this tax act is nothing but bonus after bonus after bonus for charitable giving, and the reality is that money comes from the top 10 percent.”
Hidden in the details of the new law are several changes that actually increase the value of charitable deductions for many of these donors. It is also important to note that some of the biggest tax advantages for donations for this group were left untouched.
James shared several examples.
- Donating appreciated stocks, bonds, or other assets instead of cash still avoids all capital gains taxes regardless of whether or not a donor itemizes.
- Donor-advised funds were also left untouched.
- Donors age 70½ or older are better off donating directly from an IRA.
Beyond the charitable tax benefits unaffected by the new tax law, for other donors, the tax benefits for giving have actually increased.
One of James’ first recommendations is that nonprofits investigate accepting appreciated assets. He just finished a study that analyzed 1 million tax returns from nonprofits from 2010 to 2016. For the first time, a few months ago the IRS released 990s in an electronic and readable format, which simplified complex data analysis.
Essentially those seven years of data indicate which nonprofits have grown their fundraising.
“One of the most important predictors (for increased funds) was whether or not the charity received assets, in particular securities and real estate,” he said.
Just looking at organizations that raised more than $1 million, those that just raised cash increased total fundraising 11 percent. Those organizations that received securities during that time, combined fundraising growth over the same period was 66 percent.
“So you’ve got this massive indicator of fundraising success that is driven by whether or not organizations are raising money from gifts of assets, than just disposable income cash. The power of noncash gifts to predict long-term fundraising growth applies to nonprofit organizations at every fundraising level,” James said.
“The point is, I think organizations would be well-served to use the new tax law as an excuse to convince their donors to start giving assets rather than just disposable income.”
James offers this example:
“Let’s say you own some Apple stock, and it’s gone way up in value. You can, instead of giving cash to your favorite charity, donate that highly appreciated stock that has all that capital gain in it to the charity. If you owned it for more than a year, you get 100 percent tax deduction on that.
“And then you can take that cash that you were going to give them this year, and just buy brand new Apple stock. You haven’t changed your portfolio at all, in terms of how much stock you own, the only difference is you wiped out all that capital gains from your portfolio,” said James.
Gifts of appreciated assets are cheaper because the donor avoids capital gains taxes, James said. That strategy is more powerful because capital gains tax rates are much higher than last year. The gift isn’t reliant on itemizing, but the advantage is still relevant.
“This is a big win for the donor, but also for the charity. The donor is now thinking about gifts from assets (i.e., ‘the big bucket’) rather than simply gifts from monthly disposable income (i.e., ‘the little bucket’).”
James also suggests that if a donor’s favorite charity doesn’t know how to accept stocks or bonds, the donor can simply gift them to a donor-advised fund and then have a check sent to the charity.
Many nonprofits, he said, are afraid of accepting assets because it’s more work and more hassle.
He argues that that is where a nonprofit can take a seemingly negative and turn it into an advantage by saying, ‘Hey, there’s a way that you can still get tax benefits from your giving. Here’s how we do it — appreciated assets.’
“That actually has long-term positive effects for fundraising of the organization as long as fundraisers aren’t scared to ask for gifts of wealth rather than just gifts of cash.”
And the other change is that there are now donor-advised funds that will accept any kind of valuable property, including items like partial ownership of a racehorse or unharvested crops, providing donors with more options. A nonprofit can put it in the hands of a fund and after it’s sold, disburse the proceeds to the organization.
For those donors using donor-advised funds, he recommends bunching. Donors should consolidate contributions in one year, so the deductions will exceed the standard and provide an incremental tax benefit. Then the donor writes checks from the donor-advised fund over the years he or she has taken the deduction.
For those 70½ and older, giving from your IRA qualifies as part of your distribution and is better than a deduction. It is not reported as income and the gift counts towards the required minimum IRA distribution. This tax benefit is the same regardless of whether or not the donor is itemizing.
James said it’s important for nonprofits to remember that when the tax rates get higher, the avoidance of paying taxes becomes more valuable.