I am in the middle of a project, traveling the state of Indiana instructing the Indiana University Tax Practitioner Institutes. But I have kept my eye on the unveiling of the House Republican leadership tax proposal, released just days ago.
There is a lot to digest there and I won’t put you all to sleep by going over all or most of it. But I do want to comment on one part of this plan that could have a major impact in charitable organizations, nation-wide and locally.
In order to take a deduction for charitable contributions, you must be able to itemize your deductions. That means your Schedule A total deductions, part of your individual federal income Form 1040, must be higher than your standard deduction in order to enjoy the benefit of taking a tax deduction for charitable giving on your income tax return.
The House Republican tax legislation would double the standard deduction. This would be a major tax benefit for those regularly taking the standard deduction because they don’t have enough Schedule A deductions available.
However, the Tax Policy Institute estimates that under this tax proposal, 84 percent of those currently itemizing their deductions would switch to taking the higher standard deduction. With fewer taxpayers itemizing, fewer returns would glean any tax benefit from contributing to eligible charitable organizations.
That would be a major challenge to tax exempt organizations under Section 501(c)(3) of the federal tax code. Fewer of their donors would benefit from a tax deduction as a result of their donations.
According to a story broadcast on National Public Radio (NPR), Una Osili, of the Lilly Family School of Philanthropy at Indiana University, estimates this change would lead to a reduction of up to $13 billion a year in charitable giving, with 28 million fewer Americans itemizing their returns. Osili says it doesn’t mean these people would stop giving, just that they’re likely to give less.
It is very important to note that this is just the opening proposal in a long legislative process. This measure must be marked-up (meaning, details written) in the House Ways and Means Committee. It must go through the House Rules Committee which will decide how many, if any, amendments will be considered once the legislation is considered on the House floor.
There are reports that members of the Senate Finance Committee are already working on a major re-write of any measure coming from the House. So we are a long way from any actual final tax bill.
However, where the plan starts is also very important, so we all need to pay close attention to this. Anyone involved in a local Fishers-area charitable organization needs to know that this part of the tax proposal, if part of a final bill (assuming there is one in the end), contains this doubling of the standard deduction without any changes in the charitable giving deduction rules, it would have a major impact on your fund-raising.
By the way, I recorded a podcast with my colleagues working with me on the IU Tax Practitioner Institute. It was recorded before the House tax proposal was released. You can listen to that podcast at this link.