The tax law changes passed in 2017, officially the Tax Cuts and Jobs Act (TCJA), represent the largest change to the tax code in 30 years. With so many changes, Hyperallergic wants to address — in this and future articles — how the legislation will affect the art world.
One area in particular that impacts almost everyone in the art world — from artists, to collectors and patrons, to cultural institutions — is charitable giving.
While the TCJA will affect many aspects of charitable giving, we’ll begin here with a broad picture. The effects of the new tax law will be very different depending on your income level. The wealthiest will have even more incentive to give, while the average middle class family will have less.
Interestingly, the rules for charitable giving themselves barely changed. This may be one reason why there wasn’t much fuss over the dramatic consequences the law would have on non profits while the bill was being drafted. Of course, the bill was passed at such breakneck speed, and without bipartisan input, that there was little time for public debate and the digesting of secondary effects. In my opinion as an artist, an accountant, and a citizen, the effects I outline below make a strong case for traditional protocols including a longer period for deliberation and public comment, befitting massive legislation. Tax changes can have serious ripple effects, which must be fully understood by institutions and the public before they are put into effect. This benefits everyone, regardless of political leanings; whether you’re donating to the Southern Baptist Convention or MoMA, nonprofits can’t function without your contributions.
The one direct change to charitable giving is the TCJA will benefit the very wealthy. The limit on deducting your cash charitable contributions (as opposed to property or stocks) for the year has been raised from 50% of adjusted gross income to 60%. In other words, you can now donate 60% of your adjusted gross income and get a full tax deduction this year. (You can actually donate even more, you just have to postpone the rest of the deduction to subsequent years) Obviously this limit benefits those who can afford to live on substantially less than their full income — so it tends to be relevant to only very high income people.
The TCJA also has indirect consequences for charitable giving — quite a few. The biggest comes from a basic shift in the tax structure for many Americans. Under the new tax law, many people who have previously itemized deductions on their taxes will now be taking the standard deduction. Why does this matter? Charitable contributions are only tax deductible for you if you itemize. Here’s a refresher on what it means to itemize. All taxpayers get an initial chunk of their income tax-free. You can choose to either take the standard deduction or you can itemize your deductions. The standard deduction is a fixed amount, while itemizing is variable and based on whether you have large itemizable deductions or not; the biggest three are mortgage interest, aggregate state and local taxes, and charitable contributions.
If your itemized deductions are greater than the standard deduction amount ($6,350 for an individual or $12,700 for a couple in 2017) – in other words, if you pay more in combined mortgage interest, state and local taxes, and charitable contributions than the standard deduction amount — then itemizing your deductions results in a larger tax-free amount of income.
The new law roughly doubles the standard deduction to $24,000 for a married couple and $12,000 for an individual — again, this is up from $12,700 and $6,350, respectively. But before you get too excited about this, note that the personal exemption — $4050 for each member of your household — has been eliminated across the board, which largely cancels out the benefit.
The doubled standard deduction means that many taxpayers who are used to itemizing deductions will take the standard deduction going forward, because their itemized deductions would have to be almost twice as high now for itemizing to make sense.
Another factor reducing the number of people who itemize is the TCJA’s new $10,000 limit on state and local tax deductions. This is the most overtly partisan part of the tax bill, and high tax states, such as New York and California, are scrambling to minimize the damage it will do to them. To illustrate the effects on the individual level, if you had aggregate New York state and city income taxes of $20,000, plus $10,000 of property tax, under the old laws, you could deduct that full $30,000 on your Federal income taxes. Under the TCJA, your maximum deduction is now $10,000. So, if you are married, and have $30,000 of state and local taxes, $12,000 of mortgage interest and made $1000 of charitable contributions, your itemizable deductions are now $23,000 ($10,000 capped state and local tax + $12,000 mortgage interest + $1000 charitable contribution) instead of $43,000 (full $30,000 state and local tax + $12,000 mortgage interest + $1000 charitable contribution). That’s below the new $24,000 standard deduction, so you won’t be itemizing anymore at all. And because of that, your charitable contributions are no longer tax deductible for you.
According to the nonpartisan Tax Policy Center, the TCJA will cause 21 million Americans to stop taking the charitable deduction. Among middle-income households, the share of taxpayers claiming charitable deductions will drop from 17 percent to 5.5 percent.
For the households still able to itemize deductions, the value of the charitable contribution deduction drops, because the tax rate is lower. When tax rates go down, tax savings from a deduction are lessened. While this may not stop someone from making a donation, it may reduce the dollar amount they give, and cumulatively across the US, this will reduce charitable giving.
On the collector end of the spectrum, the (almost) doubling of the estate tax exemption to $22 million for couples means that bequests made for tax-benefit reasons will drop.
How will these changes affect the art world? We don’t know yet. My guess is that smaller arts organizations that depend on donations in the $50 to $250 range will be hit hardest, as middle-income taxpayers lose their charitable giving tax incentive. Will institutions direct their focus away from the middle class and redouble their efforts to solicit high-dollar donations from wealthy donors? Will this push arts institutions further up into an ivory tower? Will museum collections suffer from the ultra-wealthy no longer making tax-free bequests to avoid the estate tax? How will arts nonprofits shift their strategies to solicit contributions? Only time will tell. Arts nonprofits do good work, and will continue to do so. And many people will continue to give to them, to support this work. But any economist will tell you that incentives matter — and, under the TCJA, the incentives for charitable giving just got worse.
DISCLAIMER: True tax advice is a two-way conversation, and your accountant needs to hear your full situation to apply the rules correctly in your case. This post is meant for general information only. Please don’t act on this alone. Hannah Cole would love to hear your tax and money questions for future articles here.