Will the New Tax Changes Affect Giving at Your Church?

When President Trump signed the Tax Cuts and Jobs Act of 2017 into law in December of 2017, church leaders wondered about the new law’s implications for ministry in 2018 and beyond. In particular, would the substantial increase in the standard deduction affect pledges for capital campaigns and overall giving?

“The Tax Cuts and Jobs Act retains a deduction for charitable contributions, but the deduction will be available to a smaller number of donors because of a substantial increase in the standard deduction,” said Richard Hammar, senior editor of Church Law & Tax Report. 

“The significantly increased standard deduction will reduce the number of persons who are able to itemize deductions on Schedule A (Form 1040) from 30 percent to as few as 5 percent of all taxpayers. The result will be a significant decrease in the number of taxpayers who can claim a tax deduction for contributions they make to churches and other charities” (see Table 1).

TABLE 1:

The bottom line: 95 percent of taxpayers have lost the ability to receive a charitable deduction. Many speculate that this will negatively affect giving at churches, while others say it will not.

Will charitable contributions suffer as a result of the increased standard deduction?

“By one estimate, the increase in the standard deduction will reduce charitable giving by $13 billion,” said Ted Batson, an attorney and CPA with the accounting firm CapinCrouse.

Whether this decline will occur depends. On the one hand, those who give because they get a tax break will tend not to give, he said. On the other hand, “churches and other religious organizations whose donors give as part of their spiritual worship are less likely to be impacted,” he pointed out. “Donors who give because they are vested in the mission of an organization are much less likely to walk away just because they will receive less benefit at tax time.”

Batson added that churches with strong and consistent teaching on biblical tithing and stewardship encourage giving for reasons other than receiving a tax deduction.

Frank Sommerville, an attorney, CPA, and editorial advisor for Church Law & Tax Report, agreed, stressing that giving is about a connection between the donor and a church. “I think that all giving comes out of relationship, period,” he said. “It’s just more difficult to have that relationship in a secular charity. It can happen … but not as frequently.”

Sommerville also pointed out that giving regularly, consistently, and generously is not about how much money someone makes. Most givers, he said, “are in the lower income category” and have not itemized in the past.

“You must remember that 70 percent of Americans haven’t itemized in the past,” he said. “So why would we think that raising that to 95 percent is going to change anything? It’s not.”

In other words, Sommerville believes the higher standard deduction will not significantly affect church giving. “I think it’s going to have an impact on secular giving,” he reiterated. “But I think that that is even overstated because you have to have an element of generosity before you even consider a gift.”

For example, said Sommerville, consider a person who has $100 to give to a charity. “If you itemize, you covered maybe 15 or 20 percent of that, but you’re still 85 percent or 80 percent out-of-pocket,” he said.

Sommerville also pointed out that a simplified tax code means that the Internal Revenue Service will no longer need to audit itemized deductions—a bonus savings for the government. “Ninety-five percent of Americans aren’t going to have deductions, so there’s nothing left to audit. And it greatly lessens the cost of checking compliance.”

Why church giving might actually increase

Changes in the tax code will mean more take-home pay for many people. This could actually lead to greater giving. The seven new percentages for withholding are 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent, and 37 percent. (The past percentages were 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, 35 percent, and 39.6 percent.)

“Many of those in the lower-to-mid-income level will see an increase in their take-home pay,” Sommerville said. And remember, he added, that a lot of people tithe off of their take-home pay rather than their gross income.

Sommerville sees this an opportunity for churches to ask their congregants to increase their giving because they now have a larger paycheck. “Maybe a church needs to increase its offering or missions giving or children’s ministry or some other area,” he said.

Evaluating “bunching” with charitable deductions 

For larger donors who want to receive a deduction, Hammar discussed the possibility of “bunching,” in which a donor could cover a couple of years of giving in a year’s time.

“Some tax advisors are recommending that donors consider ‘bunching’ their contributions to charity, making no contributions in one year, and doubling contributions in the next so that the augmented amount will exceed the standard deduction and allow persons to deduct their contributions as an itemized deduction,” Hammar said. “Whether this strategy will gain traction with church members remains to be seen.”

Sommerville thinks this strategy could work for a church that takes pledges from its members and then creates a budget based on those pledges. He offered this example:

In December of 2018, a donor not only fulfills a large pledge for December of 2018 but also fulfills a large pledge for all of 2019. If this “bunching” pushes the donation above the standard deduction for 2018, this donor could reap the tax benefits of doing so during the 2019 tax season.

Batson recalled a donor who actually let his church know in December of 2017 that he was going to write a check that would fulfill his donations for 2018 and 2019. While donating a large amount in this manner would receive the benefits of a tax deduction ahead of time, Batson said the situation poses a theological question.

“Is it possible to prepay the ‘first fruits’ of your giving ahead of time or must you receive your first fruits and pay it?” Batson asked.

Theological questions aside, there is also the issue of creating a budget around this type of contribution strategy. “In terms of managing cash flow, the approach might not be very favorable for many churches,” he said. That is, it would be difficult for a lot of churches to work bunching into their year-to-year budgeting plans.

Then there is simply the fact that bunching is not an option for most givers. Hammar stressed that such an approach “would only be appealing to the 5 percent of taxpayers whose contributions exceed their standard deduction.”

“Some very wealthy people do this,” Sommerville said. “But I don’t think there’s going to be many that do this. Typical members in the pew aren’t going to be able to do that.”

This article first appeared on ChurchLawandTax.com and has been adapted. Used with permission.