Charitable deduction: Hot topics and historical context
Tax issues related to the charitable deduction are hot topics these days as potential tax reforms are circulating in Congress. Included in the discussions, for example, is proposed SECURE Act 2.0 legislation that passed the House of Representatives in March and is now pending in the Senate. Philanthropy advisors are closely watching this legislation, in part because a version of the proposed SECURE Act 2.0 legislation calls for Qualified Charitable Distributions (“QCDs”) to be indexed for inflation. In addition, proposed legislation would allow a taxpayer to make a one-time QCD of up to $50,000 to a charitable remainder trust or other split-interest entity.
In addition to philanthropy-related tax proposals and the variety of pending budget items that could impact tax laws, the uptick in discussion about the charitable deduction in general might be catching your donors’ attention.
For example, a report updated last quarter by the Congressional Research Service, The Charitable Deduction for Individuals, provides an excellent overview of the history, policies, and fundamental concepts behind the income tax deduction for contributions made to charities. Just two pages, it’s definitely worth a glance if you are interested in a quick refresher course. You might even find it useful to share with donors.
Notably, the Congressional Research Service’s report estimates annual forgone revenue via the charitable deduction at an estimated $52.4 billion for Fiscal Year 2020, down from an estimated $57 billion for Fiscal Year 2017, just prior to increases to the standard deduction under the Tax Cuts and Jobs Act ("TCJA").
The TCJA significantly reduced the number of taxpayers who itemize deductions, including deductions for charitable gifts. Indeed, for Fiscal Year 2022, over 80 percent of the total charitable deductions are projected to be associated with taxpayers who earn over $200,000.
If you’re interested in deeper reading, the Joint Committee on Taxation recently released a thorough report summarizing the federal tax treatment of charitable contributions in more detail. And of course, please reach out anytime! The team at the community foundation is happy to share perspectives about potential tax law changes and their impact on ways your donors can structure charitable gifts accordingly.
Family legacies: Preserving donor intent
A bequest to a charitable organization is a tried-and-true estate planning technique. Whether a bequest is a specific bequest, a percentage bequest, or a remainder bequest, a donor's decision to include such a provision in an estate plan is a useful and popular way to support an organization like yours for years to come. Indeed, according to Giving USA, individuals gave an estimated $41.19 billion to charities through bequests in 2020, up 10.3% from 2019.
Increasingly, though, advisors, charities, and families may find themselves in situations where the validity of a will or other estate planning document is subject to challenge. Indeed, a “draft it and forget it” approach to bequest planning is likely not sufficient. It’s wise to help your donor look at all aspects of a future bequest during the planning stages, working hard to cover all the bases.
To help ensure that a bequest goes smoothly from beginning to end, remind your donor that the best time to make philanthropic plans really is right now. By being proactive, your donor has nothing to lose and everything to gain in ensuring that charitable wishes are carried out.
Sometimes a donor wants to leave bequests to multiple organizations and therefore prefers to adopt a holistic planning strategy. In a situation like this, the community foundation frequently works with nonprofits and the donor to establish a “shell fund” to receive bequests after the donor passes away.
A shell fund allows a donor to lay out charitable intentions, including supporting your organization and other charities, to build a broad charitable legacy. A donor can name the fund, and the shell fund agreement can be modified anytime before the donor’s death.
Please reach out to the community foundation to learn how shell funds and other planning tools can help you and your donors avoid potential future challenges and help protect your donors' philanthropic goals to support your mission.
Public scrutiny: Capitalizing on objectivity to build donor confidence
While there are certainly aspects of the public nature of the Form 990 that can help your fundraising efforts, one of the major benefits is that the information is objective and subject to review by a third party. Certainly those themes are emerging as data and analysis becomes available concerning the impact of public information available on nonprofit organizations’ tax returns.
Many nonprofit organizations take advantage of the community foundation’s services for that same reason, meaning that donors often gain confidence in a nonprofit organization if its assets are being managed by an independent, community-focused institution whose purpose it is to exist in perpetuity.
For instance, a donor may wish to establish a designated fund that allows the donor to direct giving to a specific agency or purpose. Over time, the community foundation's staff manages the distributions from the fund according to the terms established by the donor.
An agency fund is similar to a designated fund, except in the case of an agency fund, the source of the initial contribution is you--the beneficiary nonprofit organization--not a donor or donors as is the case with a designated fund. Nonprofit organizations frequently establish agency funds at the community foundation to set aside reserves or rainy day funds. The team at the community foundation is adept at navigating the specific accounting standards that are unique to this type of arrangement.
In these ways, the community foundation can help you and your team instill confidence in your donors to further boost the power of the Form 990 as an objective source of information and stability.
Please contact our team to learn more. We’d love to help!
This newsletter is provided for informational purposes only. It is not intended as legal, accounting, or financial planning advice.