Frequently Asked Questions about the Tax Cuts and Jobs Act of 2017
Here's a brief overview of the major changes impacting nonprofits and charitable giving: changes in income & estate taxes that may impact charitable giving, and issues related to taxes nonprofits pay & remit as employers.
1. When will the Federal Tax Cut and Jobs Act go into effect?
Many of the changes to the federal tax code passed on December 20, 2017, take effect with the start of the 2018 Tax Year on January 1, 2018, including changes in corporate and individual tax rates, and the increase in the individual standard deduction.
2. When will we know what kind of effect the new federal tax law is having on charitable giving?
2018 individual income tax returns will not be due until April 15, 2019, and then cumulative reported effects of change tax laws will not be evident until late 2019. Giving USA, the most widely used comprehensive report on philanthropy, published annually by the Giving Institute, will report on 2018 numbers in mid-June 2019. Individual organizations will likely be able to share some information on how their level of contributions are changing under the new tax code.
3. How will the tax bill effect the amount of individual charitable giving in Kentucky?
The federal tax code will continue to allow an itemized deduction for charitable contributions, but because of other changes in the tax law, fewer people are likely to itemize. According to the Tax Policy Center, about 11 percent of U.S. households are projected to itemize deductions, down from 26 percent under the prior law. Other sources predict as few as 5 percent will itemize deductions. Several national organizations have attempted to estimate how the reduction in the number of taxpayers itemizing their deductions will reduce contributions. These estimates range from $13 billion to $22 billion fewer gifts to charity per year. Of course, donors contribute because of the cause they are supporting, not solely for the tax savings - which is why it is difficult to predict how individuals will adjust their contributions based on tax changes.
There is still much we don’t know about how this might impact charitable giving in Kentucky. KNN’s research with IUPUI highlights that of the 25% of Kentuckians itemizing their deductions in 2014, 82% claimed the charitable giving deduction – this was 21% of all taxpayers in Kentucky and it generated $1.9 billion in gifts to charity. Many nonprofit organizations are concerned about the potential impact of fewer donors itemizing, and therefore fewer with a direct federal tax benefit for charitable giving.
It's important to note that Kentucky taxpayers who do not itemize deductions on their federal income tax return may still itemize in Kentucky, which would include their charitable giving.
The tax bill increased the charitable giving limits for taxpayers who itemize deductions from the current cap of 50 percent of adjusted gross income (AGI) to 60 percent of AGI. This change will enable higher income taxpayers to deduct a higher percentage of their overall income for contributions to charitable nonprofits in 2018.
The incentive to make major charitable bequests will be reduced as a result of the Federal Estate Tax threshold doubling to $11 million single/$22 million couple, indexed, with the tax rate staying at 40 percent.
4. How are Kentucky organizations adapting their fundraising communications under the new tax law?
For the most part, the communication objectives and messages remain the same as before the law was changed – which is to provide persuasive information on the achievements and goals of the organizations seeking contributions. Charitable organizations with 501(c)(3) status can continue to communicate that contributions are tax deductible, and can inform their donors of the Kentucky Charitable Deduction.
5. Will this tax bill impact corporate or foundation giving?
There were no changes that directly affect private foundation contributions; they will still be subject to a 5 percent payout requirement and be subject to a 1-2 percent excise tax.
Reduction in the corporate income tax from 35 percent to 21 percent reduces the tax incentives for corporate charitable giving, though corporations have many considerations in deciding contribution levels. As a significant beneficiary of the new tax law, corproations will hopefully increase charitable giving. The Giving USA study will be watching and will report on trends.
6. How has the unrelated business tax (UBIT) calculation changed?
Nonprofit organizations are required to pay a tax for income generating activities unrelated to their charitable mission, by reporting these activities and calculating the tax on IRS Form 990T.
Unlike the 2017 UBIT calculation where all income was applied to all expenses, beginning in 2018 each line of business will report its own income and expenses, and calculate the taxable amount for each business line.
Tax law changes how nonprofits report unrelated business income and losses and how they can utilize net operating losses in connection with it. What are these reporting changes? The IRS has not yet released guidance. Organizations filing 990T forms (Exempt Organization Business Income Tax Return] will need to track activities, lines of business, and where business losses originate to comply with this new provision, in active consultation with their tax and audit professionals.
7. How will the new tax law affect employee withholding?
The new individual tax rates will mean that many individuals will see changes in the amount of federal taxes they owe, and so may want a different amount withheld from their income for federal taxes. US employers are required to withhold income taxes from employee payrolls, and the IRS provides tables to help employers know the proper amounts for withholding. Most employees will see/have seen a small reduction in federal tax withholding starting in February, implemented by their employer based on the new withholding tables.
8. How will the student loan interest deduction be affected?
There is no change the $2500 student loan interest deduction for those who qualify (benefit phases out as income increases and is not available once singl earners make more than $80,000 and couples earn more than $165,000. For now, the Public Service Loan Foregiveness Program remains unchanged.
9. How will employee transportation benefits be affected?
The new tax code makes changes to transportation benefits – payments nonprofits might make to help employees with transportation. Under the new law, if the nonprofit organization makes payments directly on behalf of the employee, they can be penalized. A nonprofit can still provide support through pre-tax qualified plan and reimburse expenses. Organizations should examine their policies to see if they need to change the way they provide this benefit.
10. How will nonprofit budgets be affected by the 21 percent excise tax on highly compensated employees?
The new tax code requires nonprofit employers (other than hospitals) to pay a special 21 percent excise tax for salary in excess of $1 million a year for the top five individuals. (Very few nonprofit employers compensate at this level to be affected by this provision, though a number of colleges and universities will be.)
11. What tax decisions will the State of Kentucky need to make in response to the federal tax bill?
Kentucky’s individual income tax and corporate tax systems use federal tax law in many ways as their starting points, so when there are federal changes, state policymakers need to decide whether and how to adapt the state tax code to reflect those changes. Their decisions may impact the amount of state taxes households and corporations pay and state tax incentives for charitable giving.
The starting point for Kentucky’s personal income tax is the federal adjusted gross income (AGI). Kentucky’s reference date to the federal code for income tax purposes is currently December 31, 2015. To change this starting point would require action from the Kentucky General Assembly.
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