Arguably the biggest impact the new tax laws will have on Americans, no matter what socio-economic class they may belong to is the major changes to the personal or non-business deductions, which deductions a taxpayer can elect to either itemize or take a standard or fixed amount, whichever generates the larger deduction. Before President Trump’s tax law, which was signed on December 22, 2017, personal deductions included, in part, the taxpayer’s real estate and local property taxes, state and local income taxes paid, interest paid on mortgages on a primary and second residence (capped at $1 million in acquisition and improvement indebtedness), interest on a home equity line of credit (capped at $100,000 of indebtedness), medical expenses (exceeding a threshold level), and charitable contributions. Up to approximately one-third of Americans choose to itemize their deductions over using the standard deduction because the total of their actual authorized personal deductions yielded a larger sum than what the government standard deduction offered. However, the new tax law has changed this.
First, the standard deduction has been significantly boosted (i.e., from $12,000 to $24,000 for a married couple filing jointly). Second, those personal expenses that can now be deducted for tax purposes have been dramatically narrowed. For example, the deduction for state and local income taxes and local real estate and property taxes are limited to an aggregate of $10,000, interest on equity lines of credit are no longer deductible, and interest deductible on a mortgage on a primary or secondary home is capped at $750,000 in indebtedness. Because of this, many more Americans will opt to use the standard deduction rather than itemize their deductions because their permitted itemized deductions will not hit the $24,000 threshold. Therefore, it is more appealing to opt for the standard deduction. Accordingly, it is estimated that roughly 94% of taxpayers will claim the standard deduction in 2018. At first glance this may seem like a “win” in that it will simplify the preparation of tax returns; however, a substantial pit-fall of the new tax law is that it disincentives taxpayers who are taking the standard deduction from making charitable donations because they will no longer be gaining any tax advantage by doing so.
Charity executives and experts are predicting that starting next year, millions of relatively small donations from moderate-income Americans to mainstream charities will sharply reduce. This means that charitable giving could become less of a middle-class commonality and more of an exclusive act by the wealthy, which already tend to give to arts and cultural institutions, research facilities, and universities rather than mainstream donations such as religious institutions and local causes. Mr. Steve Taylor, Senior Vice President and Counsel for Public Policy at the United Way Charity, stated that “Some 7.2 million people donate less than $1,000 yearly–on average $154–to the United Way… We’re very concerned. A lot of charities are in shock. Charities feel totally blindsided and like we have been thrown under the bus.”
Charities may have to rework how they pitch their appeals to donors. According to Lucas Swanepoel, Vice President for Social Policy at Catholic Charities, “we [now] have to redouble our efforts… We really need to make sure we’re telling the stories of the differences it makes in people’s lives.”
These same concerns and sentiments are being seen in the Jewish community, as many Jewish Charities and Synagogues are getting ready for what they fear may become a reality – fewer donations and contributions. Virtually all-Jewish groups are convinced the new tax bill will result in fewer charitable donations to Jewish federations, synagogues, day schools, and social safety net programs. Andres Spokoiny, CEO of the Jewish Funders Network, which works with Jewish donors to maximize their impact, shared his concerns, “the consensus among experts is that when all is said and done, it [the tax bill] will be detrimental for charities and philanthropy… Of particular concern to charities is the plan to double the standard deduction… making it much more attractive not to itemize and simplifying the tax filing process.” In a statement, the UJA-Federation of New York said, it is “very concerned that several provisions in the proposed tax legislation bill will lead to an overall decline in charitable giving…” and Naama Haviv, Director of Development at MAZON, a Jewish response to hunger, said she fears “major gifts will disappear.”
In conclusion, the new tax law is certainly causing a lot of concern and consternation amongst non-profit organizations. As February 2018 approaches, these organizations have no choice but to revamp all efforts, while they wait-and-see how many donations they may lose. While the new tax law without a doubt makes the deduction process easier for most Americans to understand and do themselves, it will also deter millions of Americans from making charitable donations because itemization is no longer an attractive option. The hope is that most charitable causes are important enough to Americans to continue to donate, but only time will tell if that is true.
This article has been featured on Ynet (in Hebrew) – see link below:
For more information on the new tax laws and their impact on charitable donations, contact Alon Harnoy.