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Challenges to the Charitable Deduction: What You Need to Know

The nonprofit sector is reacting to events at a fast and furious pace right now, but there’s one issue that beats at the heart of our work that you and your organization should know about.

Changes to the 100-year-old charitable deduction and the estate tax lurk quietly – but significantly – on the sidelines, threatening future nonprofit funding.

The charitable deduction isn’t an issue that can command a crowd for a march and it might never make the top 3 things your organization is worried about right now, but for the nonprofit sector and every organization in it, it’s big.

It’s a critical issue that you want to consider before donors, clients, and board members ask you about it.

Both President Trump and the House Ways and Means Committee have floated tax proposals that would limit (or perhaps even abolish) the charitable tax deduction people receive for making a charitable donation. There have also been proposals to completely eliminate the estate tax, which currently provides an incentive to make bequests to charity.

There’s long been debate and speculation about how (and how much) these kinds of changes would affect the amount of money given to charities. And this isn’t the first time the issues have been raised and debated. In 2011, Robert F. Sharpe, an expert in planned giving wrote in The Chronicle of Philanthropy:

“Central to understanding this debate is one simple truth: Regardless of tax rates, it always costs money to make a charitable gift. That is why the tax deduction for charitable gifts is by no means the primary motivation for most donors when deciding to make donations. That being said, limits on charitable deductions can increase the cost of gifts and can cause donors to change the amount and timing of their gifts.”

Others think the combination of the threat to both the charitable deduction and the estate tax are particularly dangerous. Just yesterday, tax lawyer and expert Conrad Teitell was quoted in a Forbes article called This May be the Last Year You Get a Charitable Tax Deduction”.

“It’s by far the greatest threat to tax-encouraged charitable gifts that I’ve seen in over half a century. It would be a double whammy.”

In addition to the threats that nonprofits face on their individual issues, these tax issues are critical and they require the nonprofit sector to work together and speak with a bigger voice.

One of our clients asked me recently what steps they should take to prepare for changes to the text code. To be honest, I told them that it’s really difficult to predict what is going to happen and even more difficult to plan.

But, it’s critical that nonprofits engage in this debate – since it’s all about us and the people we serve.

Here’s what you and your organization can do :

  1. Know the tax plans and their effects: Be informed about what is being proposed and how it could play out for your organization and your donors. There isn’t a lot out there yet, but you could start this Fast Company Article that gives you the basics.
  2. Contact your legislators: Eventually, these decisions lay in the hands of Congress. Nonprofit organizations have a say, too. We provide jobs as well as serve the community. Let your voice be heard!
  3. Engage your board around this issue: Your board needs to know the issues and to do their own advocating to friends, colleagues, and representatives. It might not be your first priority, but board members need to understand the charitable deduction and how it might affect your organization.
  4. Talk to your friendly financial advisors: Financial advisors that support your organization may be watching this debate closer than anyone and it would be wise to open the dialogue as they will be talking to their clients about support to your organization.
  5. Stay engaged: Don’t put your head in the sand. I know it’s tempting. There’s so much to do! But try to find a couple of colleagues or partner organizations and write a letter or ask for a meeting with a legislator as a group.

Let’s not let this debate about us happen without us.

Sure, donors will still give something, but at this time in our history when our social fabric is seriously worn, can we really afford to wait and see how a repeal of charitable deduction and the estate tax will play out?

The nonprofit sector picks up the pieces after tax cuts and government budget reductions. Let’s at least ensure the incentives to fund our efforts are kept in place to do that vital work.

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