Tax law changes lead to decreased charitable giving

by Cal Rose ([email protected]) 1,040 views 

Whether you’re tinkering at the Scott Family Amazeum, taking in a Broadway show at the Walton Arts Center, or hiking a trail preserved by the Northwest Arkansas Land Trust, it doesn’t take long to experience the impact nonprofit organizations have provided to Northwest Arkansas. But nonprofit organizations, like their for-profit counterparts, can only provide educational and charitable services to the extent their funding allows, and recent changes in federal tax law may have caused the biggest decrease in individual charitable giving in over a decade.

According to the annual Giving USA report released in June, individual charitable giving in 2018 declined by 3.4% (after adjusting for inflation), the biggest drop since the height of the Great Recession. The Tax Cuts and Jobs Act of 2017 (the “Act”) simplified filing for many taxpayers by expanding the standard deduction to $24,000 for a married couple. However, in doing so, the Act disincentivized charitable giving by making it more advantageous to use the standard, lump-sum deduction rather than itemizing deductions received from mortgage interest, state taxes and charitable donations.

According to an estimate from the Joint Committee on Taxation, about 17 million taxpayers itemized in 2018, a significant drop from 46.5 million who itemized in 2017. The remaining 88% of taxpayers elected for the standard deduction, meaning they received no tax benefits from charitable giving.

Additionally, the Act changed several tax laws that previously provided tax breaks for certain donations (as many Arkansas Razorback season ticketholders have discovered). The Razorback Foundation recently announced the creation of the Cardinal & White giving program, due in part to tax law changes under the Act. Under prior tax laws, taxpayers could deduct 80% of any amount donated to a college or university (or for their benefit) in exchange for the right to purchase tickets to home athletic events.

Under the new tax laws, no part of the donation is deductible if the taxpayer receives any right to purchase tickets in return. Many universities have attempted to reward donors through the use of a “point” system that would allow donors to redeem points to purchase premium seating or gain access to exclusive experiences. While the IRS hasn’t yet issued official guidance on the use of point systems, early indications are that these programs would not provide donors with a charitable deduction, making it more difficult for college athletic programs to raise funds for capital improvement projects, student-athlete wellness programs and the occasional head coach buyout.

It’s likely too early to know whether the trends from 2018 will continue in future years. On one hand, the stock market drop in late 2018 may have dampened year-end charitable giving; on the other, many taxpayers may have made charitable gifts in 2018 without knowing the effects of the new tax laws. It will take another year or two to know for sure, but in the meantime, nonprofit organizations should plan for the possibility of declining revenues.

There does appear to be a silver lining in the recent giving reports. Donations from corporations increased during 2018, which helped offset some of the decrease in individual donations, and generous Americans still gave $292 billion to U.S. charities in 2018. While the national reports paint a gloomy picture, I should note, in my best Mervin Jebaraj impersonation, that NWA appears to be bucking the national trend, largely due to increased corporate sponsorships and foundation giving.

Ultimately, taxes are not the reason why people give to charities, but they do appear to have an impact on giving. The old standard deduction will return in 2025 unless Congress extends the Act. Until then, nonprofit organizations in NWA still need our support, deduction or otherwise.

Editor’s note: Cal Rose is an attorney with Wright Lindsey Jennings in Rogers. He can be reached at [email protected]. The opinions expressed are those of the author.