How the New Tax Law Will Affect Nonprofits and Fundraising

The Tax Cuts and Jobs Act (TCJA) that was signed into law by President Trump in December 2017 is one of the worst pieces of legislation ever passed, mainly because it so dramatically widens an already obscene gap between rich and poor. The Tax Policy Center estimates that in 2018, taxpayers with incomes of $1 million or more will get an average tax cut of $69,660, while those under $75,000 will get an average cut of $353. By 2027, 81% of the tax cuts will go to those taking in more than $1 million, while taxes on those making less than $75,000 will go up.  The new tax law also cuts discretionary spending (already at a six decade low) and increases the national debt by $2 trillion over ten years. And this is just the tip of iceberg. You can find many critiques of this bill in any number of places, including this excellent and short critique from Dollars and Sense.

Let’s focus specifically at how the TCJA changes tax law as it relates to nonprofits and the charitable tax deduction, which is probably what you’ve heard a lot about. I have to admit to an enormous irritation at the way that so many nonprofits, including organizations that advocate on behalf of the nonprofit sector, have focused almost exclusively on the charitable tax deduction. A much more harmful impact of the tax cuts will be on the nonprofit organizations that will be even more overwhelmed than they already are trying to meet the growing needs of Americans who are struggling to survive.

Prior to the passage of this tax law, 70 percent of Americans filed an IRS short form for their tax return, meaning that they did not exceed the standard deduction and thus received no benefits for their charitable giving. With the doubling of the standard deduction under the TCJA, about 85 percent of Americans will file a short form. I am not convinced that this will cause giving to shrink and I think the “research” on this is not well done. Almost everyone refers to “studies” but the truth is that studies about the effect of the charitable tax deduction show a variety of results depending on who is asked and how the questions are framed.  Those who truly believe that tax incentives make a big difference should be advocating for higher tax brackets—the higher your bracket, the more you save.  

The really terrible part of the TCJA for nonprofits is the virtual elimination of the estate tax. Granted, few people paid the estate tax even under our previous presidents, but given that the estate tax is our nation’s oldest tax and one of the only taxes that is truly redistributive of wealth, we should all be talking about it much more, and organizing to reinstate a more equitable estate tax.

So, what is a social justice group to do now that the TCJA is law? Here are some ideas:

  • Stop saying that donors are going to stop giving because they won’t be able to deduct their contributions from their taxable income. Why even suggest that people’s generous and philanthropic behavior should be motivated in any way by a financial benefit?  No one, from the furthest left- to the furthest right-wing person, believes that the charitable tax deduction was ever the main incentive for giving. And most people realize that it is, at best, one of many reasons people make donations.

  • Without the added tax-deduction incentive of giving to a 501(c)3 nonprofit, the door is open for social justice groups to raise a lot more money for (c)4 work. (Donations made to 501(c)4 organizations have never been tax deductible.) This means that campaigns for policy changes in the government arena will not have a disadvantage when it comes to raising money and could make an important difference at a time when much progressive public policy is being undermined and reversed by the current administration. This is very important in a year when so much is at stake in the electoral arena.

  • There are still some important incentives for giving, and one which I don’t see social justice groups using nearly enough is the Individual Retirement Account (IRA) Rollover Provision. Once an individual with an IRA reaches the age of 701Ž2, they are required to take annual withdrawals from the IRA, and then to pay income tax on that withdrawal. However, if they give directly from their IRA to a nonprofit charity, then they don’t pay income tax (keep in mind that this amount is capped at $100,000). This is an incentive that nonprofits should inform their donors about.

  • Know that many people are already giving money where they see a need—to help shelter an undocumented family, to pay the legal bills of someone fighting an unfair eviction, or to help people with out of control medical costs. This trend has grown with the technology that has developed over the past several years to allow people to create crowdfunding campaigns without the infrastructure of a whole organization, with millions of dollars raised every year for individual needs. If we want people to continue to support organizations, we are going to have to do a better job helping them understand the added value of being a 501(c)3 nonprofit (this will be the topic of a forthcoming article that I am writing which we will post on our Facebook page and web site when it’s available).

  • All of us are going to have work harder to maintain relationships with our donors, something we should be doing anyway. We need to continue to educate ourselves about what a fair and just tax system would look like, and not just believe what is proclaimed by national nonprofit organizations that rarely look at issues through a more progressive race and class lens.

At the end of the day, we don’t know all the ways that this new tax plan will affect us and our work, but we do know, as always, that the fight for justice and equity should shape and propel our fundraising, and our giving.

For a very thorough run-down of all the ways the TCJA affects nonprofits, you can read this article on our website.