Unintended consequence of tax reform bill could hurt nonprofits
In my experience over eight years of preparing hundreds of individual income tax returns, I’d estimate about one-third of my clients itemize deductions because their actual deductions exceed their standard deduction.
The new tax law will nearly double the standard deduction (the standard deduction for single taxpayers will increase from $6,350 to $12,000 and for married filing joint returns, the standard will increase from $12,700 to $24,000). I think the percentage of my clients itemizing deductions will decrease to less than 5 percent under the new law.
This will be great for simplifying tax preparation, but it will have unintended consequences for charitable giving.
Under the old law, most taxpayers who itemize, consider the tax benefits associated with charitable giving. For example, a taxpayer with a marginal tax rate of 25 percent, might contribute $100 to a charity knowing he’d get a $25 reduction in taxes. Thus, his net out-of pocket would be $75.
Under the new law, if he no longer itemizes, he may think, “I’ll give $75 instead since there’s no tax break.” Others may be less inclined to continue charitable giving knowing there’s no tax advantage.
Therefore, I predict that charitable giving will decrease under the new law.
If I’m right, Congress may be pressured to make amends.
One thing that could be considered is to move charitable giving from Schedule A Itemized Deductions to Form 1040 under Adjusted Gross Income, making charitable giving an adjustment to taxable income. This would give all taxpayers a tax break for their charitable gifts.
Tim Doyle
Bluffton
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This story was originally published January 4, 2018 at 2:49 PM with the headline "Unintended consequence of tax reform bill could hurt nonprofits."