Charity Tax Changes That Nonprofits Hate Could Be on the Way Out, Experts Say

Legislation that sharply shrank the number of Americans who have access to tax breaks for their charitable gifts has only been in place for two tax years, but odds are there will be changes soon, said tax experts at a conference in Washington on Tuesday. But if nonprofits want to see major changes passed into law, they need to step up their lobbying and present a more united front than they did during the debate over the tax law passed at the end of 2017, they said.

Eugene Steuerle, a fellow at the Urban-Brookings Tax Policy Center and one of the organizers of the conference, said the limited nature of today’s charitable tax deduction has little political support. As a result, he predicted the charitable deduction was ripe to be tweaked again.

“There are going to be some major changes soon because the charitable deduction as established in the Tax Cuts and Jobs Act was simply unsustainable,” said Steuerle. “Any deduction that is available to only higher-income taxpayers and only 10 percent of them is simply politically unsustainable.”

It’s not clear exactly how much impact the change in the tax law had on charitable giving, but nonprofit leaders and tax experts say they think it had a big impact on middle-income and affluent donors. That’s because the law sought to simplify the tax system by doubling the standard deduction. For example, couples can now claim the standard deduction — and avoid itemizing — for up to $24,000 in deductible expenses like housing and charitable giving when in the past that deduction covered just $12,000. That means just 8.5 percent of Americans itemized their taxes and had access to the deduction in 2018, according to recent data, compared with 24 percent in 2017.

Overall figures last year showed that giving by individuals declined 3.4 percent after inflation, a sign experts said that the tax law had changed giving behavior. That drop, plus a 15-year slide in the share of Americans who give, prompted experts to suggest that new approaches to tax incentives for giving are needed.

Roger Colinvaux, director of the law and public policy program at Catholic University of America’s Columbus School of Law, said if the standard deduction changes from the 2017 tax law stay in place, charities would become more dependent on the wealthiest Americans, who still have access to deductions.

“We could expect this to undermine many of the key values to the charitable sector, and the first one is pluralism” said Colinvaux. “If you take away so many donors, what does that say about the sort of charitable sector that survives?”

What’s more, Colinvaux predicted that many of the dollars Americans may have once earmarked for charity may soon find their way to other organizations, such as political-action committees, advocacy groups, or crowdfunding efforts, such as those that benefit a single person in need of medical care.

Hillary Bounds, vice president for legal at Mark Zuckerberg and Priscilla Chan’s Chan Zuckerberg Initiative, she encounters many donors who want to support political groups because they have become a key element in the kinds of changes that donors want to see in the world.

“If using policy change is critical for the social change you want to see, then as a donor who is middle class, I would get my money and give it to a (c)(4),” said Bounds.

A Smarter Charitable Deduction?

The prospect of a charitable-deduction change led the experts to suggest an array of approaches. In place of the existing charitable tax deduction, Colinvaux suggests that people who give a minimum in cash could have access to a credit if they don’t want to itemize. Other donors could still itemize and take advantage of current law.

The appeal of a credit, say tax experts, is that the impact is the same on all donors; deductions are more valuable for the highest earners so tend to discriminate against the low-income donors.

Colinvaux said a credit “could really generate a lot of middle-income givers to enter into the system.”

But if those kinds of changes are going to become reality, nonprofits must present a united front to legislators, experts said. The lack of such unity, Steuerle said, is a big reason the charitable deduction was changed so sharply in 2017. In the future, he said, nonprofits need to approach lawmakers regularly and consistently. And that effort, he said, needs to be primarily financed by the biggest players in philanthropy, namely the big foundations and large national nonprofits with the deeper pockets.

“I’m going to put a little blame on the charitable sector,” said Steuerle. “The whole issue could have been avoided if the charitable sector had been able to come to some agreement about how to create a stronger charitable deduction.”

State-Level Enforcement

Tax experts also called for better enforcement of laws that govern nonprofits. Noting that the IRS’s enforcement of nonprofits is basically toothless now, Jill Horwitz, vice dean for faculty and intellectual life and professor of law at UCLA, said states need to develop more-robust oversight Horwitz said that states, particularly their attorneys general offices and their court systems, already have a lot of levers they can pull to regulate donors and charity operations. “We are going to have to shift our attention back to state law and devote more resources to state regulation,” said Horwitz.