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New law may leave nonprofits feeling taxed

Changes to deductions from Tax Cuts and Jobs Act may lead to reduced charitable giving

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April 10, 2019

With Tax Day right around the corner, many Americans are wondering how the changes brought about by the Tax Cuts and Jobs Act will affect their returns. Nonprofit organizations are paying particularly close attention, as economists have predicted that the legislation will result in a decrease in charitable giving.

Arizona’s nonprofit sector comprises nearly 20,000 organizations, many of which deliver vital services to the community in fields such as health care, education and housing. Collectively employing 167,000 Arizonans, the nonprofit sector is the state’s fifth largest private employer. In 2014, Arizona’s nonprofits generated $2.1 billion in tax dollars for the state — or 9.5% of all state and local sales tax revenue.

A report by the L. William Seidman Research Institute estimates that donations to nonprofits in Arizona will decline by $272.7 million annually due to the Tax Cuts and Jobs Act. To better understand this estimate and what it means for Arizona’s nonprofit sector, ASU Now spoke with Dennis Hoffman, director of the L. William Seidman Research Institute at the W. P. Carey School of Business at Arizona State University.

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Question: What changed in the law to disincentivize charitable giving?

Answer: The new federal tax law significantly reduced the amount of itemized deductions that can be claimed on federal tax forms. While taxpayers can still claim charitable deductions, their inability to claim other deductions (e.g. state and local taxes above $10,000) means that many filers will choose to take the new higher standard deduction. Affected filers will then no longer receive reductions in taxes as a result of their charitable giving. 

Again, giving is deductible for those who itemize, but fewer will itemize so the deduction is irrelevant for them. As a result of this change, the effective after tax “price of giving” increases. This will reduce total giving, which Seidman estimates at $272.7 million, or approximately 5% of all giving in the state of Arizona in 2018.

Q: What is the economic impact to the state of this decline in giving?  

A: Seidman estimates that this erosion of the nonprofit sector, which depends on charitable donations, will translate into a $775.4 million reduction in the state’s gross domestic product, 10,587 fewer full and part-time jobs, and $493.5 million less in labor income.

Q: Are there any legal or policy changes that could support reversing this trend?

A: The best option for reversing this trend would be the addition of a separate line for charitable deductions that would allow both itemizers and those claiming the standard deduction to claim a charitable deduction.

Q: What other changes should the average person expect to see this year when filing their taxes?

A: It really depends on one’s circumstance. The biggest adverse impact will fall on those taxpayers that have historically claimed large state and local tax deductions as itemized deductions. Others will benefit from the new higher standard deduction level and the lower marginal tax rates. And whether that translates into higher or lower refunds this year depends upon how your deductions have changed as a result of the law and whether you adjusted your rates of withholding throughout 2018 in anticipation of these new law changes.

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