As 2017 came to a close, one topic seemed to dominate the headlines: tax reform. As news of sweeping changes made its way from Capitol Hill to Facebook, assumptions were touted as truth, and opinions spawned heated arguments.
Personally, I began receiving emails from concerned clergy: How will tax reform affect people’s giving to my church? While we don’t really know for sure, let’s explore some details that may inform how you approach the conversation with your congregation.
Charitable Contribution Deduction Continues
Although some tax reform proposals eliminated deductions for charitable contributions, the final bill did not eliminate—or even limit—the deduction. That’s good news.
However—there’s always a “however” with tax legislation—a significant change to the standard deduction (see below) will likely decrease the percentage of taxpayers who itemize their deductions.
Standard Deduction Nearly Doubles
Although the charitable contribution deduction was spared in the overhaul, it’s likely fewer people will bother with it. Why? Because for 2018, the standard deduction is nearly double what it was last year: $24,000 for married taxpayers filing jointly and $12,000 for singles.
It’s safe to assume most taxpayers will gladly accept the standard deduction. In fact, experts predict only 5% of households will itemize going forward, compared to 25% in 2017. So, persons for whom tax benefits are their primary motivation to give will likely be less generous in the future. The Lily Foundation predicts this change alone will reduce charitable giving by $13 billion per year.
Percentage Limitation Improves and Pease Limit Suspended
In the past, the deduction for charitable contributions was capped at 50% of Adjusted Gross Income (AGI). Now through at least 2025, that cap is set at 60%. For taxpayers with a higher net worth, this simply means they’ll be able to deduct more of the current year’s contributions, as opposed to doing a carry forward as they may have in the past.
In another boon to higher income taxpayers, the Pease rule has been suspected through 2025. (The Pease rule reduced some itemized deductions by up to 3% depending on the household’s AGI.)
Gift and Estate Tax Exemption Doubles
For 2018, the gift and estate tax exemption is $11.2 million. For 2019 through 2025, it’ll be $10 million, subject to inflation. We expect this exemption to be throttled all the way back to $1 million beginning in 2026, which may have a significant impact in 2025.
Considerations for Churches
- Motivation matters. Although some pundits are taking a doom-and-gloom perspective on charitable giving, there’s an important distinction to be made between secular and Christian givers. Most people who give to churches and ministries aren’t primarily motivated by tax benefits; they’re motivated by biblical teaching, by gratitude, and by the good that’s being done in their local communities. In other words, a family who contributes $18,000 per year to your church isn’t likely to stop doing that because of tax changes. Rather, it’s reasonable to assume they’ll take that new standard deduction and continue to be generous. Moreover, many families may be paying less in taxes, which means they’ll have more resources to give away.
- Strengthen your generosity culture. If motivation truly matters, then you should be doing all you can to create a culture of generosity that keeps the focus on the real motivations for giving. Regular preaching on giving, teaching in small groups, proper stewardship of your givers, regular communication of the impacts made through your amazing ministries…all these things (and more) will help to grow giving. If you’re not sure you’re doing all you can in this area, let’s talk about a generosity coaching engagement to evaluate what you’re doing and make the needed changes to improve.
- “Bunching” is the new strategy. Tax advisors are encouraging their clients to “bunch” their contributions to exceed the new standard deduction. That means people who’ve typically spread large contributions across multiple years may make sizable contributions in one year. That sounds great, but you’ll need to consider how that will affect your ministries’ cash flow. Given the alarm bells being rung in late 2017, it’s possible some of your high capacity givers made their 2018 contributions last year!
- Educate your congregation about non-cash gifts. Under the new law, some taxpayers may benefit from giving appreciated stocks, rather than cash. Also, IRA Charitable Rollovers are now permanent. For an introduction to IRA Charitable Rollovers, download my new e-book: Establishing a Culture of Legacy Giving in Your Church.
Although it’s important to be in-the-know about tax reform and how it may impact giving to your church, it’s just as important to focus on the eternal implications of generosity. Christian leaders must continually inspire and challenge our congregations to give. Need help? Drop me an email. I’d be honored to have a conversation with you.