How could proposed tax reform impact you?

May 2017

While most nonprofit health and human services (HHS) organizations’ funding comes from fees for service and government grants, BDO’s forthcoming benchmarking survey, Nonprofit Standards, found that on average, five percent of funding came from individual contributions in the last year. The White House’s preliminary tax plan, released in late April, may have implications for individual giving habits. Nonprofit healthcare organizations should keep a watchful eye and plan for the potential changes. While the Internal Revenue Code (IRC) hasn’t seen a major overhaul since 1986, the tax law as we know it today may not be the tax law even a few months in the future.
The plan keeps the itemized deduction for charitable contributions while eliminating most other itemized deductions. It also proposes raising the standard deduction, which could impact taxpayers who itemize their taxes—and who are responsible for a significant portion of charitable giving.

What does this mean for America’s tax-exempt healthcare providers? In a nutshell, nonprofit healthcare organizations should encourage their donors to contribute now to take advantage of the more impactful deductions that may not be available in the future. Accelerating charitable deductions now could be critical to maximizing fundraising potential if near-term tax reform includes a dollar cap on total itemized deductions, like charitable donations. Favorable provisions that now allow fair market value deductions for gifts of appreciated property to charity could come under scrutiny as well, further complicating fundraising potential.

If (and when) tax legislation is passed, the effective dates of the new rules remain unknown.  Effective dates can range from the date of enactment, to tax years beginning after the date of enactment, or even to future or retroactive years (tax legislation usually does not have a retroactive effective date, but it can happen). And different provisions will have different effective dates. Regardless of how tax code changes shape up, encouraging giving now—while the outcome is predictable—is imperative. Below are some of the key details of the changes proposed in the White House’s preliminary tax plan that could impact individual giving:

Lowering the number of tax brackets from seven to three: at 10 percent, 25 percent and 35 percent. It hasn’t been specified which levels of income would be affected.

Elimination of many itemized deductions and increasing the standard deduction:
  • Trump’s plan proposes eliminating most itemized deductions outside of the charitable deduction and itemized deduction for mortgage interest. The elimination of the state and local tax deduction could significantly decrease the number of taxpayers who itemize their deductions.
  • The Trump plan would also increase the standard deduction from the current $6,350 for individuals and $12,700 for joint filers to $12,700 and $25,400, respectively. This means fewer people may be itemizing, and therefore may not be as concerned about generating deductions through charitable contributions.

Estate tax:
  • Trump has also proposed eliminating the federal estate tax, currently at 40 percent. Charitable contributions from an estate reduce the overall taxable estate. If there is no estate tax, charitable requests may be significantly reduced.

The future of charitable giving incentives

The charitable deduction is one of the 10 largest tax expenditures in the IRC and has long been subject to proposed modifications, including extensive hearings held in 2013, which we covered here in the Nonprofit Standard. Proposals to limit the deduction have included dollar caps, floors that must be exceeded before contributions may be deducted, and credits instead of deductions, among others. In addition to monetary contributions, many hearings have fomented debate on whether the treatment of gifts of property to charities should be revisited. Every time changes are proposed, the nonprofit industry seeks to analyze how the proposals would raise revenue and impact charities.  
Not all tax code proposed legislation negatively impact charities, however. Last year, Senators John Thune (R-S.D.) and Ron Wyden (D-Ore.) introduced the Charities Helping Americans Regularly Throughout the Year (CHARITY) Act. Among the provisions in the CHARITY Act, the Senate asserted that the promotion of charitable giving should be one of the goals of comprehensive tax reform. The House Tax Reform Blueprint, proposed in late 2016, would also provide incentives for charitable giving.
As charities make their fundraising push for the second half of 2017, they should encourage donors to make gifts now while the tax outcome is certain, rather than waiting until next year when the rules may be changed in a way that negatively affects their bottom line.
Of course, donors’ motivation to make charitable contributions isn’t limited to the tax benefits. Despite the interplay between tax deductions and charitable giving, the 2014 U.S. Trust Study of High Net Worth Philanthropy found that a desire to make a difference (73.5 percent) and personal satisfaction (73.1 percent) were the main motivators behind giving, while tax benefit was cited by just 34.4 percent of respondents. Considering these statistics, it’s clear that conveying a compelling mission is key to attracting and retaining donors, no matter what happens with tax reform.
However, the implications of tax reform shouldn’t be discounted. There is enormous competition for charitable donations, and while individual contributions make up a modest proportion of health organizations’ revenue overall, the evolution from fee-for-service to value-based payment models in healthcare makes every dollar as critical as ever. It’s essential to make your organization’s mission emotionally compelling and relevant to take advantage of current favorable giving arrangements that may not last. 

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