Charitable Giving Challenges
How will last year’s tax reform affect giving to faith-based organizations in 2018 and beyond?
Faith leaders began discussing this question with congressional leaders many months before Congress sent the Tax Cuts and Jobs Acts to the president’s desk last December. While some questions will be answered only after donors have adjusted their giving in light of their changed 2018 tax bills, two of the tax law’s biggest effects on charitable giving are clear, and neither is positive.
Leaders of both parties have introduced straightforward legislation in Congress to fix these two problems. However, the path forward for some of these bills is unclear now that the midterm elections shifted control of the House of Representatives to the Democratic Party.
Doubling Standard Deduction
Throughout 2017’s tax reform process, Republican leaders emphasized that they were not changing the charitable deduction. Technically, that is correct. The key word, however, is “technically.”
By doubling the standard deduction, the Tax Cuts and Jobs Act effectively removes millions of Americans from the category of taxpayers who itemize. These givers will no longer benefit from—or be incentivized by—the tax code’s charitable deduction.
Congress’s own Joint Committee on Taxation has estimated that 28.5 million fewer taxpayers overall will itemize in 2018. According to the Urban-Brookings Tax Policy Center, 21 million of these will be charitable givers whose donations will no longer be subject to the benefits and incentives of the charitable deduction.
Rather than itemizing, it will make financial sense for these 21 million taxpayers to claim the new standard deduction, which now stands at $24,000 for married couples filing jointly and $12,000 for individuals. Those affected will predominately be lower- and middle-income Americans whose itemized deductions will add up to less than the new standard deduction.
The American Enterprise Institute concluded in June that—when combined with smaller effects due to the new law’s other changes—doubling the standard deduction will reduce charitable giving in 2018 by $17.2 billion. Based on the total dollar value of 2017 giving, this would mean that in 2018 the Tax Cuts and Jobs Act will reduce giving by individuals by approximately 6 percent.
Some on Capitol Hill have said privately that they believe faith-based giving will be reduced by much less than this, if it is reduced at all. According to this view, religious givers are motivated solely by duty and devotion. They will continue to give all their customary tithes and other donations regardless of what their tax bills look like—or so the thinking goes.
It is true that religious givers—like all American donors—give for many reasons. Their gifts’ effect on their tax bill is just one of those reasons, and it usually is a secondary one.
However, the widely respected Indiana University Lilly Family School of Philanthropy found last year that tax‑law changes similar to those in the Tax Cuts and Jobs Act would reduce overall charitable giving by 4.4 percent. When researchers broke this down, they found that these tax changes would reduce faith-based giving by a slightly greater percentage (4.7 percent) than all other giving (4.3 percent).
This may seem surprising. However, a wide range of other research has shown that religious givers are one of the most generous categories of Americans. On average, they stretch to give a higher percentage of their income than others do. Taxing Americans’ charitable donations is likely to a have a greater (negative) effect on those who give a higher percentage of their income.
Universal Charitable Deduction Legislation
Fortunately, there is a solution. Last fall Representative Mark Walker (R-NC) and Senator James Lankford (R-OK) introduced the Universal Charitable Giving Act (H.R. 3988/S. 2123). Their proposal would allow taxpayers to deduct charitable donations even if they don’t itemize—creating a so-called universal charitable deduction. It would limit the amount of the charitable deduction to one third of the standard deduction, that is, $4000 for individuals and $8000 for married couples filing jointly.
This year Representatives Chris Smith (R-NJ) and Henry Cuellar (D-TX) introduced the Charitable Giving Tax Deduction Act (H.R. 5771). Their bill differs from the Walker-Lankford proposal by placing no new limit on the amount of charitable donations a non-itemizing taxpayer may deduct. Neither bill would make any changes to how the charitable deduction works for taxpayers who itemize.
Of the two bills, the Walker-Lankford Universal Charitable Giving Act has far more cosponsors, 20 Republicans and six Democrats. However, it is unclear which of these two bills will have the greatest chance of success once the leadership of the House changes—or whether another Democratic leader will emerge to champion a third option.
A New Tax on Parking and Transportation Fringe Benefits
Although faith and other charitable leaders paid a great deal of attention last year to the proposed doubling of the standard deduction and its likely effects on charitable giving, a new provision with negative impacts on faith-based and other charitable organizations went largely unnoticed.
The puzzling new provision, section 512(a)(7) of the IRS Code, requires nonprofits to pay a new “unrelated business income” (UBI) tax on the parking and transportation fringe benefits they provide to their employees. This tax applies to faith-based nonprofits, including churches and other houses of worship.
Oddly and illogically, the Tax Cuts and Jobs Act characterizes a nonprofit organization’s expenses for its employees’ transportation and parking fringe benefits as income derived from an unrelated trade or business. It then imposes a 21 percent UBI tax on these expenses.
Of at least as much concern, the new provision requires faith-based and other nonprofit organizations to file IRS Form 990-T. By some estimates, tens of thousands of churches and other houses of worship will, for the first time in history, be required to file federal tax returns.
Many members of Congress have reported being as surprised as charitable leaders when they learned of this obscure new tax. And although the law requires the Treasury Department to issue guidance explaining how section 512(a)(7) should be applied, so far it has not done so.
For now, the UBI tax would apply to any direct payment or reimbursement a church or other faith-based nonprofit makes for its employees’ transportation and parking. It also appears any nonprofit that provides its employees free parking in any parking garage or lot it owns is required to pay taxes on the value of providing and maintaining that parking.
Houses of worship and other faith-based organizations with such expenses should have been making estimated payments in each quarter of 2018. But with no direction from Treasury to guide them, thousands probably have failed to do so and may face both interest and penalties.
Three separate bills to repeal the tax have been introduced in the House of Representatives by Representatives James Clyburn (D-SC), Michael Conaway (R-TX), and Mark Walker (R-NC). If the new UBI tax is not repealed before January, Democratic Congressman Clyburn’s bill could end up being the main focus of repeal efforts in the Democratic-controlled House.
However, leaders of faith-based and other charitable organizations are determined to see the new UBI tax repealed during the “lame duck” session. Eliminating this new UBI tax and the destructive precedent it sets of requiring houses of worship to file tax returns is an important priority for numerous faith communities.
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Whatever Congress does on these issues, one thing is clear. Despite so much focus today on high-profile philanthropy, socially conscious investing and volunteerism, policy makers and the public are increasingly unaware of how tax policy regarding charitable giving affects the vitality and independence of faith-based organizations and the services they provide to communities across the nation.
Much more must be done to educate Congress and the public about the vital care faith-based organizations provide for the physical, relational and spiritual needs of their communities. Faith-based organizations must show how essential the charitable donations of individual Americans taxpayers are to those efforts. Without unified efforts to do this, the financial well-being of America’s faith communities is likely to remain of only minor importance to many who decide our nation’s tax policy or who vote for those who do.
Brian W. Walsh is a Washington, D.C.-based attorney and serves as Executive Director of the Faith & Giving Coalition, a multi-denominational, multi-religious initiative working to protect and promote faith-based and other charitable giving. Want to learn more? Click here to email Mr. Walsh.