Tax Policy Changes Could Protect and Enhance Charitable Giving

David Heinen, Vice President for Public Policy and Advocacy

If you haven’t yet filed your 2018 federal income taxes, there is a good chance you have a folder at home with records of the charitable contributions you made last year. There is an equally good chance you will never actually use these records when you file your taxes. The tax change at the root of this phenomenon is causing significant concern for nonprofits across North Carolina.

Why are your receipts from your donations likely to sit dormant in the folder this spring? The Tax Cuts and Jobs Act that was signed into law in December 2017 nearly doubled the federal standard deduction. Under the new law, only about 5% of taxpayers itemize their deductions on their federal taxes. Until 2017, 31% of Americans itemized their deductions and therefore received tax benefits for their charitable contributions. The new tax law means that 95% of Americans now have no tax incentives to make charitable contributions.

While the charitable deduction is only one of many reasons that people donate to houses of worship and nonprofits, the higher standard deduction inevitably means that many North Carolinians will give less than they have in the past. Research from Indiana University, the American Enterprise Institute, and the Tax Policy Center suggests that the increased standard deduction will reduce charitable giving by about 3%-5% per year. Anecdotally, many nonprofits have told the NC Center for Nonprofits that they experienced a reduction in individual giving in 2018. Even more have told us they expect a bigger drop in giving in 2019 once donors have filed taxes under the new law for the first time.

Nonprofits are advocating for common sense tax policy changes that would fix this unintended consequence. In 2017, Congressman Mark Walker (R-NC) introduced the Universal Charitable Giving Act, which would make the charitable deduction available to all taxpayers by creating a universal, non-itemizer deduction for charitable contributions. Senate Democrats tried to amend the Tax Cuts and Jobs Act with a nearly identical proposal.

Of course, with gridlock reigning in Washington this year, it’s unlikely that Congress will pass any significant tax law changes. Fortunately, state lawmakers can ensure that North Carolinians continue to give generously to the work of nonprofits and houses of worship by making three simple changes to the state tax code.

Creating a universal state tax incentive for charitable contributions

It is impossible to pinpoint exactly what percentage of individual philanthropy is motivated by tax deductions or credits. It is inevitable, however, that if the cost of giving goes down (i.e., taxpayers are getting money back on their taxes for their charitable contributions), overall giving will increase. Adding a special tax credit or deduction would give donors a reason to think more intentionally about the amount of charitable contributions they make - particularly in the final days and weeks of each year.

Since Congress is unlikely to pass major tax legislation this year, nonprofits probably need to look to state lawmakers to create new tax incentives for charitable giving. This is actually a familiar concept for North Carolina policymakers. Until 2014, North Carolina’s tax code allowed individuals who did not itemize their deductions to take a tax credit for charitable contributions in excess of 2% of their adjusted gross income. Because 2% is the average portion of income that people contribute, the credit rewarded giving that is above average. As a result of this credit, low and middle income North Carolinians made $500 million in private contributions to churches and other nonprofits every year. 

The General Assembly could help preserve charitable giving by creating a new state tax credit or an above-the-line deduction for charitable contributions by taxpayers who use the standard deduction.

Fixing the state IRA charitable rollover

One of the unique (and not in a good way) features of North Carolina's tax code is that it imposes a tax penalty on seniors who make charitable contributions through their individual retirement accounts. In December 2015, Congress made permanent the IRA charitable rollover, a federal law that enables taxpayers who are 70 ½ and older to make tax-free distributions from their individual retirement accounts (IRAs) to charitable nonprofits. In 2014 and future years, North Carolina has decoupled from the IRA charitable rollover, meaning that retirees who donate to nonprofits from their IRAs are subject to state income tax on these contributions. North Carolina is the only state that has decoupled from the IRA charitable rollover.

While North Carolina retirees who donate through the IRA charitable rollover can, in theory, deduct these contributions from their state taxes, most of them use the standard deduction on their state taxes (so they do not benefit from state charitable deduction). Because the federal and state laws are different, retirees have more complicated state tax filings when they make charitable contributions from their IRAs. Some also make smaller charitable contributions to offset the state taxes they are required to pay on these donations.

Legislators can fix this problem by (finally) conforming the state tax code to the federal law on the IRA charitable rollover.

Clarifying the law on sales tax on nonprofit fundraising events

Under current law, sales tax is charged on admission fees to entertainment activities, which are defined to include live performance or events of any kind, the purpose of which is for entertainment. Many nonprofits hold live events or performances as fundraising events and wonder whether they need to charge sales tax on the fees for these events. The reasoning that leads to their confusion is that:

  1. Several types of activities offered by nonprofits – such as participation fees, tuition or fees for educational events, and tax-deductible charitable contributions – are expressly excluded from sales tax on admission fees. There is no similar exemption for nonprofit fundraising events.
  2. On the other hand, the primary purpose of fundraising events is to raise funds to support the nonprofit’s mission and activities rather than to provide entertainment. Based on the statutory definition of taxable "live events," perhaps sales tax doesn't apply. After all, these events typically do not compete with commercial entertainment options.

The reality is that nonprofits do not have clear guidance on whether they need to charge sales tax on their ticket prices or fees for attending fundraising events. Adding sales tax to ticket fees often creates administrative burdens for nonprofits and reduces the amount of revenue from events that goes to nonprofits’ missions. Out of an abundance of caution, some organizations charge sales tax anyway. Lawmakers should clean up this ambiguity in the state tax code by clarifying that nonprofit fundraising events are not subject to sales tax.

The bottom line (and why it will be lower for nonprofits without some common sense policy changes)

Without changes to bolster tax incentives for charitable giving, many nonprofits will experience a drop in contributions this year. This may not be a problem if most nonprofits were flush with extra cash. The reality, however, is that 56% of North Carolina nonprofits said last year that they didn't have enough resources to fully meet the demands for their services. If lawmakers don’t act to support charitable giving, we can expect even more unmet needs in communities throughout North Carolina.

See the published article, “A Better World: Nonprofits Watch as Tax Changes Impact Giving” (paywall), in the February 21, 2019 issue of the Triangle Business Journal.

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