The Biggest Advantage for Your Donors Under the New Tax Law
There’s been a lot of hand-wringing among nonprofits and charities over the changes that are taking place in the tax code reform. Yet despite these major changes, capital gains tax remains one of the biggest tax advantages for your donors.
Every administration wants to do something with the tax code. Promising tax reform is almost always in their political best interest because nobody is ever fully satisfied with the way things are in the tax code.
Even under the threat of reform every four years, there are three main items within the tax code that have largely been deemed “untouchable:”
- Mortgage interest rate deductions
- The standard deduction, and
- The charitable deduction.
This year is the first I’ve heard so much concern over the tax reforms, and that’s because each of these “untouchables” was threatened with change. It’s largely thought that each of these in some way affects the overall generosity of donors as they weigh the tax ramifications of their giving.
But here’s what happened, and how your donors still have one of the biggest tax advantages in the world when it comes to charitable giving.
Mortgage Interest Deduction Lowered
For almost all of 2017, we heard rumors and threats that the mortgage interest deduction was going to be taken out in the tax reforms. But what happened was that it was lowered to $750,000.
Prior to the Tax Cuts and Jobs Act of 2017, the mortgage interest deduction was set at a million dollars. Now, mortgage interest is deductible on mortgages of less than $750,000. State and local deductions on mortgage interest are also limited now to $10,000, which is considerably less than in years past.
Since this historically important tax deduction has been trimmed down, some pundits raised concerns that it could hurt charitable giving. But here’s where the other areas of the tax reform makeup for that cut made on the mortgage interest deduction.
The Standard Deduction Increased
For Middle America, this should be good news: The standard deduction has gone up in the new tax law. For married couples filing jointly, it’s gone up to $24,000.
Again, this has caused a stir among nonprofit sector thought leaders who think this increase in the standard deduction will harm charitable giving. But I agree with Robert Sharpe’s analysis.
“As a whole, tax reform in its final form should have little impact on charitable giving by lower-income individuals as well. That is because most of the donors who do not currently itemize their gifts will remain in that category and should continue to make their gifts which historically account for a relatively small portion of total giving by individuals.” – Robert F. Sharpe, Jr. The Sharpe Group
Annual giving shouldn’t be dramatically affected by the tax changes. Most of the donors who do not currently itemize their gifts will remain in that category and should continue to make their gifts as normal.
It’s important to note that donors who give annually and do not itemize there gifts historically account for a relatively small portion of your nonprofit’s budget.
This is not to say that these generous people are not important! They certainly are. But strategically speaking, there should be no grave cause for concern.
Especially when it comes to faith-driven donors. For them, giving isn’t a tax driven goal anyway. At its root it’s about stewardship and obedience.
The Charitable Deduction Raised
With the standard deduction being raised, it came as a pleasant surprise to see the charitable deduction also being raised.
Now, instead of the 50% deduction taxpayers could claim, they can claim up to 60% of their adjusted gross income from their charitable giving, if they’re giving cash.
So let’s consider a common scenario. We have a married couple with property taxes of $10,000 and $6,000 in mortgage interest who normally give about $500 a month or $6,000 a year. That’s below the $24,000 new standard deduction limit.
How could they take advantage of their charitable deductions but still not waste any of their standard deduction?
One way is to accelerate or load up their giving into one year to take advantage of the deductions. For example, they could donate the amount of two years or maybe three years of giving into one year.
So if they are giving an average of $6,000 a year, and they give the equivalent of two or three years in the span of one year, now they would be over the $24,000 standard deduction limit in that year. They could then itemize, take advantage of the shared deduction, and then the following year go back to just using the standard deduction when they return to their regular giving habit of $6,000 per year.
Essentially, charitable giving just got easier for those that will no longer itemize their charitable giving.
The increased standard deduction means givers will receive the same or perhaps greater tax benefits as they would have received for their charitable gifts in prior years. But they wouldn’t have to go through the extra steps necessary to substantiate the deductions with receipts on their federal tax returns as they have in previous years.
As shown in that previous example, somebody could continue to make their $6,000 a year of giving, but take a $24,000 a standard deduction versus the $18,000 that they would have otherwise qualified for. That’s encouraging for a couple of in the lower income bracket couple who wants to be faithful in their giving, but they really don’t have a complicated situation.
The Big Advantage: Asset-based Giving
The biggest advantage for your donors in this new tax code is that the tax benefits of giving appreciated public stock did not change! And I highly encourage you to keep this at the forefront of your major giving or asset-based strategy.
For the donors who’re planning to take the standard deduction, gifts of appreciated public stock or other appreciated asset become more important because they can avoid the capital gain tax, which reduces the taxable income they may have otherwise recognized.
Over the last couple of years, we’ve had this generally tremendous rise in stock prices, which means higher capital gains taxes when your donor goes to sell that stock.
Avoiding the Capital Gains Tax
But if they give that stock to your organization, not only will they avoid the capital gains tax, they’ll also get a fair market value deduction on the sale.
For example, if I paid $5,000 for a block of stock and now it’s worth $10,000, I can gift that to charity and not recognize that $5,000 of long-term capital gain. Or, if I bought a rental house 20 years ago and I paid $50,000 for it and now it’s $150,000, I could give that rental house and avoid the $100,000 worth of long-term capital gain.
But in addition, I still get a full fair market value deduction for both of those examples. So, my taxes are deducted at the $10,000 fair market value of the sale of my stock in example one, and at $150,000 for the sale of my rental house in example two.
That’s a HUGE advantage that taxpayers in most other countries just don’t have!
With all the turmoil and political fighting around the new tax laws, keep this strategic advantage in front of your donors. It’s a win for them and their family. And it’s a win for the mission you’ve been called to steward!
To experience the benefits of asset-based giving in your nonprofit, let’s talk.