When there’s no incentive
How the 2018 General Session affected nonprofits
By Kevin Rudolph
(May 18, 2018—ANNAPOLIS, Md.) If you hadn’t heard, it’s nonprofit month here at the Maryland Chamber. So let’s get caught up on how the recent federal tax reform will potentially affect the nonprofit community.
Ready?
We’ll start by taking a look at the past
Since the creation of the modern American tax system, there has always been a place for tax-exempt organizations, such as nonprofits.
In arguably the first major piece of federal legislation dealing with our tax system, the Wilson-Gorman Tariff Act of 1894, there was inclusion of the exemption status for charitable organizations—nonprofits being covered under this definition. Two decades later, as part of the Revenue Act of 1917, the individual income tax deduction was codified and, in doing so, incentivized charitable giving through the tax code.
How it works
When you file your tax form you have the option to deduct certain eligible expenses toward your total tax liability. There are generally two ways to do this for individuals:
- Standard deduction or Itemized deduction
The itemized deductions are where we find expenditures, such as certain medical expenses, state and local income tax, charitable contributions, and more. This means that to receive tax benefits for charitable giving a tax filer must use itemized deductions.
Under current law, the deduction sought, whether standard or itemized, must be the same in both federal and state filing. Meaning if you use the standard deduction on your state tax forms, you must use the same on your federal tax forms.
Federal Tax Reform
Through the Tax Cuts and Jobs Act of 2017, the first major federal tax reform legislation since the 1970’s, a number of changes were made to the tax code that affected not only charitable giving, thus affecting many non-profits, but also individuals and industries across the spectrum.
The new law increased the federal standard deduction by nearly 90 percent. Additional changes include decreasing the state and local taxes that can be deducted from federal income tax, using the itemized deduction. The state and local tax change had a major impact in Maryland as we have higher state and local taxes than most states in the country—some states even have none.
With the increased federal standard deduction and arguably certain decreases in itemized deductions, the federal tax law incentivized Americans and Marylanders with this state and local tax deduction to use the federal standard deduction instead of the itemized deduction.
Why is this significant?
Because only tax filers who itemize can claim charitable contribution deductions.
The State of Maryland predicted that around 700,000 Marylanders will switch from using the itemized to using the standard deduction. That means there are 700,000 Marylanders who are no longer incentivized through the tax system to contribute charitability.
This doesn’t mean that those who don’t use the itemized deduction do not give to charities or that those who now will switch to the standard deduction will stop giving to charity. However, the potential for charitable giving to decrease due to lack of incentive is a possibility. The direct financial effects to the nonprofit community, however, are yetl to be determined.
Next year & Maryland law
Due to the federal tax legislation not fully being realized until after the 2018 Legislative Session, the General Assembly was hesitant to respond to the new federal law until they saw the direct effects based on a year of data.
We expect next session to receive data on what worked and what didn’t with the federal tax legislation and to adjust it accordingly. We believe our tax system should make everyone better off. That is why we work hard to make sure that what employers and employees want is evaluated when creating law and policy.
Although the federal tax legislation does not appear to help nonprofits, be assured that we will work diligently to correct any negative effects and help re-incentivize charitable giving.
For further information please check out the Comptroller’s 60 day report.
Get the break down of how other new laws will affect your business, attend our regionally available Legislative Wrap-Up Tour.
