A Fundraiser’s Guide to New Tax Rules: Volume 1
It’s a new year and if you haven’t yet heard, we have some new tax laws to tangle with. Much has been written about how these new rules will affect everyone, including charities. It can seem scary, because let’s face it – most people don’t like to talk about taxes and we tend to be afraid of what we don’t fully understand. Fear NOT! I’m here to de-mystify it for you.
There are just a few things that a charitable fundraiser needs to know about the new tax rules. To make it more digestible, I’m going to discuss the following over multiple volumes.
- What Changed?
- What Stayed The Same?
- Where Are The Opportunities?
- What Should We Say To Donors?
First, What Changed?
The most significant change means that fewer people will itemize their deductions. What the heck does that mean? To understand this you must first know what a deduction is and the difference between itemized deductions and standard deductions.
- A deduction reduces taxable income.
- A taxpayer has to choose either standard or itemized when filing their tax return.
The standard deduction is a set number for every taxpayer. It’s lower for single people than those married filing jointly. Itemizing deductions means that the taxpayer adds up all their potential deductions like charitable contributions, state income and property taxes, etc. If all of the itemized deductions exceed the standard, then they can choose to itemize. Bottom line, the taxpayer chooses the method that reduces their taxable income the most.
The standard deduction was virtually doubled under the new rules. It increased from $6,350 to $13,000 for single filers and from $12,700 to $24,000 for those married filing jointly. This means that fewer taxpayers will have enough itemized deductions to exceed the standard. Only itemizers can use charitable deductions to reduce taxable income.
Next, how do we talk about this?
Some people feel that this will greatly decrease the number of people who make moderate contributions to charity, because they won’t see a direct tax benefit from the gift. This assumption is wrong. People who make charitable contributions do so because they want to make a difference, not because they want a tax deduction. Tax deductions are a nice bonus, but it’s not the primary motivator. If this weren’t true, people wouldn’t care where they made gifts. Americans are the most generous nation in world history. It’s part of our cultural makeup. We will continue to give whether a charitable deduction is available or not.
This does mean that we must focus more heavily on the difference that the gift will make, rather than the tax benefits of the gift. Instead of saying things like “Make a tax-deductible gift today.”, you may consider:
- Make a gift that makes a difference today.
- Make a gift that makes our work possible.
A Strategy and An Opportunity….
One strategy that some donors may use as a result of this rule change is being called “bunching”.
Donors may give two or three year’s worth of gifts in one year to increase their itemized deductions above the standard deduction. For the next year or two they may not make their normal charitable gifts. This way, they give the same amounts over time, but they also ensure they can deduct them directly.
The biggest opportunity you have to promote tax-beneficial gifts is to promote the Qualified Charitable Distribution or IRA Charitable Rollover.
A Qualified Charitable Distribution is a direct transfer from an IRA (Individual Retirement Account) to a charity. Normally, virtually all distributions from an IRA are fully taxable to the owner. The QCD is a tax-free distribution to charity. It also counts towards the owner’s RMD (Required Minimum Distribution). RMDs must begin after the owner turns 70 1/2. The distribution is virtually all taxable. The owner must take the distribution whether they want to or not. Many people don’t need or want the RMD. A QCD is a great alternative, but there are a couple stipulations on who can make one of these gifts.
- Must be 70 1/2 or older at the time of the transfer
- Only $100,000 per year/person qualifies
- Gift is not deductible
By making one of these QCD gifts, the donor not only avoids unwanted taxable income, but they can make a significant charitable gift to charities they care about. The gift is not deductible, but it also doesn’t show up as taxable income in the first place. Taxable income increases AGI (Adjusted Gross Income). AGI determines lots of things on a tax return. For example, it determines how much of your Social Security income is taxable and how high your Medicare premiums are. By directing taxable IRA income to charity as a QCD, they donor will avoid increasing AGI and potentially avoid higher tax on Social Security income and higher Medicare premiums. Not bad, huh?
This might feel like a lot to digest, but it really comes down to two things:
- Fewer people will see a direct tax benefit from charitable gifts, but it likely won’t decrease Americans’ desire to give.
- The rules have changed, but opportunities still exist all around us.
In the next volume we will look at another change, another opportunity, and more messaging suggestions. Until then, remember to breathe and focus on your mission!
Dana is a professional speaker, consultant and the creator of Turning Wealth Into What Matters™, a Growth Coaching Program for Fundraisers and Professional Advisors.
This is the clearest explanation that I have seen yet – Thanks Dana!
Thank you! I strive to make things simpler for everyone.