The changes to the tax code enacted by Congress in 2017 may have a negative impact on charitable organizations, especially churches. But not all will experience a downturn.
Opportunities abound to deepen our faith in God, to improve the means by which we support our ministry financially, and to help our congregations experience more cheerful giving.
How Does the Tax Law Affect Giving?
First of all, let’s start with a basic understanding of how the law might affect giving in your church. Two items in the new law have a direct bearing on how generous members will be. One: lowering the tax rates themselves hurt charitable giving. And two: even more so, increasing the standard deduction may cause contributions to your church to decline.
Lower marginal tax rates reduce the incentive to give by making donations more expensive. The sidebar below provides the nitty-gritty details that demonstrate the rise in cost. When the cost of donating goes up, the amount donated predictably goes down. For top earners, the difference could be between four and seven percent, reducing a $2,000 contribution to $1,860.
[su_spoiler title=”Click to the see the Math – The Cost of Donating” icon=”chevron-circle”][su_note]For 2017, the highest marginal tax is 39.6 percent. Any money that a family makes over $470,700 (married filing jointly) will be taxed at that rate. A $1,000 charitable donation will reduce their taxable income, providing a $396 dollar tax reduction. At the new top rate of 37 percent, the deduction much lower: only $370.
Taking into account the deduction, a $1,000 donation actually cost the donor only $604 under the old rate ($1,000 less the $396 deduction). Under the new rate, the same donation will cost more: $630. Perhaps the $24 difference seems minimal, but there is a potentially greater impact.
Imagine that a donor is willing to give whatever amount would cost them $1,000 net of taxes. At the old rate, the donation would be $1,655. However, the new rate would see a donation of $1,587 – a $68 difference.
And because not only are the rates changing, but also the tax brackets, many top donors will experience a rate drop even lower, to 35 percent, resulting in a $1,538 donation at that same $1,000 net cost. That’s a $117 loss.
“My members are not top earners,” you might say. However, the same principle applies to middle-income donors. A drop from 28 to 24 percent will result in a $73 loss of donation. And while we may hope that donors would direct their tax savings to the church, history teaches otherwise.
According to a study by Indiana University, decreasing the top marginal rate could reduce charitable giving by 0.8%. While this pales in comparison to the changes in the standard deduction (below), most charities and faith communities would feel the pinch of such a reduction.
[/su_note] [/su_spoiler] The standard deduction increase will cause a even bigger reduction, especially for churches. The new tax law nearly doubles the standard deduction from $12,700 to $24,000 for a married couple filing jointly. Fewer people will choose to itemize their deductions. The standard deduction will make more sense for most. People who don’t itemize charitable donations are half as likely to make charitable contributions at all. By not itemizing their charitable donations, they will not donate quite as generously. This will decrease charitable giving by 3.9 percent. That’s nearly $20,000 out of a half-million dollar budget!
How could this impact your church?
Indiana University studied the proposed tax bill in May 2017. They concluded that charitable giving may be reduced by as much as $13.1 billion, a 4.4 percent reduction. In addition, they predicted that faith communities will experience even greater losses, a 4.7 percent reduction. That is because their constituents are much more likely to leave itemized deductions behind and embrace the higher standard deduction.
A decrease of this magnitude will leave many congregations with difficult decisions to make. Either cut programs or reduce staff.
But is there another response?
What should churches do now to prepare for the effects of the new tax law? Here are our suggestions:
1. Pray and Reflect Theologically
This is the perfect moment to “withdraw to a deserted place and pray.” Set aside some additional time to allow God to speak peace to these concerns. Draw on the resources of scripture and the depths of your own understanding of God’s divine providence during difficult times. Remember that God has provided everything we need. Jesus instructed his disciples that they would “do greater works than these.”
Also, it’s helpful to keep in mind that these changes are set to end in 2025. As they say, nothing lasts forever. The grass withers and the flowers fall, but the word of the Lord endures.
2. Diversify your Revenue Streams
Congregations rely on the offering plate to pay the bills. In the fundraising world, we would call this “annual giving.” Consider the other sources of revenue that are available or could be available in your church. User fees and rent are an option for some. Growth and income from invested resources might be another.
Because the new tax code is, in part, designed to reward asset holders (ie., the stock market) at the expense of middle-income earners, a congregation might consider improving their asset-based giving. Planned giving and capital campaigns are both proven ways to significantly offset operational expenses with larger gifts of accumulated wealth.
3. Double-Down on Solid Stewardship Practices
Congregations that explicitly teach generosity and financial stewardship as a joyful response to God’s grace will be more resilient to the coming changes. Though families may face tough decisions, those invested in the mission of the congregation will make every effort to maintain and grow their stewardship as they can. Is your church teaching sound stewardship principles? This is a good time to reevaluate and refresh your stewardship program.
We can reasonably expect that changes in tax law will impact our congregations. An opportunity arises, though, to deepen our faith in God, to improve the means by which we support our ministry financially, and to help our congregations experience more cheerful giving.