The Tax Cuts and Jobs Act, a sweeping tax reform, was signed into law on December 20, 2017. Most of its provisions take effect starting in tax year 2018. Below are some of the key changes under the Act that will affect nonprofits in the coming years.
The TCJA increases the adjusted gross income (AGI) limitation for individual donors' cash contributions to charities from 50 percent to 60 percent. This means that donors who itemize their deductions can deduct cash contributions totaling up to 60 percent of their AGI, instead of the current 50 percent. This higher percentage should act as an incentive for wealthy people to give more money to charities.
However, taxpayers can only deduct charitable contributions if they itemize their personal deductions instead of taking the standard deduction. The TCJA nearly doubles the standard deduction for individual taxpayers. This means there will be far fewer taxpayers who will itemize their deductions—and give to charities. It has been shown that people who itemize and get a tax benefit from charitable giving are far more likely to donate to charities than non-itemizers. Therefore, any benefit from the 10 percent AGI increase for contributions will more than likely be offset by the overall lower number of taxpayers expected to itemize their deductions.
The TCJA substantially increases the threshold to qualify for the estate tax. Under the new law, estates worth up to $11 million for individuals and $22 million for couples will be exempt from the federal estate tax starting in 2018. A likely outcome of this higher estate tax exemption will be a decrease in bequests to charitable organizations since one of the main reasons people make charitable bequests is to avoid the estate tax.
The new tax law changes how unrelated business income tax (UBIT) is calculated. Instead of being able to aggregate all of its UBIT and offset gains and losses from different sources, charities will be required to calculate UBIT separately for each unrelated business in which it is engaged. As a result, charities will no longer be able to use losses from one unrelated business to offset gains from another.