What does SALT have to do with charities and why should we care? We’re not talking about the mineral, although both types of salt influenced politics and shaped communities. Instead, we need to understand how changes to this particular tax law may impact charitable organizations in the future.
Historically, taxpayers have been able to deduct the amount that they pay in state and local taxes on their federal returns. This tax deduction, also known as the state and local tax (SALT) deduction, has been in place since the creation of the federal income tax in 1913. It often benefits taxpayers in states with higher property and income taxes as well as higher income households (81 percent of tax filers with incomes exceeding $100,000 claimed the deduction).
The Tax Cuts and Jobs Act that passed in December of 2017 caps the SALT deduction at $10,000. Any amount of a taxpayer’s state and local tax bill that exceeds that amount cannot be deducted on their federal tax return.
Hijacking the Charitable Deduction
Some state and local governments (like California, New Jersey, New York, Maryland, and Washington, D.C.) are concerned that the new cap on the federal SALT deduction will prevent them from collecting enough state and local taxes. Currently, policymakers in these states/municipalities are considering allowing taxpayers to classify any taxes that they owe over the $10,000 cap as a charitable donation on their federal tax return. These policy proposals encourage to donate to a government-affiliated charitable organization.
Impact on Charities
What does using the charitable deduction as a vehicle for state and local government revenue mean for charities and the communities that they serve? This issue is so new, there is not a definitive answer to this question. Instead, there are at least four issues that charities and policymakers will need to examine over the course of this debate:
- Blurred Line between Government & Charity – Historically, charitable organizations, and the tax deductible donations that support them, serve as private sector compliments to government. Charities step in when government fails to meet a community need, particularly for smaller groups of citizens. The charitable deduction was created over 100 years ago to encourage citizens to give more to private charity in spite of tax code changes. The current proposals do not acknowledge this history and confuse the public’s understanding of why charities and charitable giving are distinct from government.
- Questionable Legality – A major tenant of the charitable deduction is that the taxpayer does not receive a personal benefit from his/her donation. Legal experts currently are debating whether it is legal to use a charitable donation to receive tax benefits unrelated to charitable purposes.
- Unclear Impact on Giving & Community Resources – The use of the charitable deduction as a vehicle to fund state and local government may directly or indirectly impact charitable giving. What the impact may look like remains unclear. Taxpayers deducting SALT through the charitable deduction may displace some of their more traditional charitable giving, reducing the amount of revenue flowing to charities and the overall amount of resources available to the community. However, it’s also possible that taxpayers’ combined SALT and charitable donations would add up to an amount that would motivate them to itemize rather than claim the standard deduction, which could incentivize a larger proportion of people to give more because they can access the charitable deduction. Either impact needs to be known prior to implementing this policy, because it determines the net total resources that communities have at their disposal. Creating a work-around to retain tax revenue for state and local governments may not be the best approach if it simultaneously reduces private community investment in charities.
- Obscured Tax Reform Impact on Charities – The sector and policymakers are looking closely at how the 2017 tax reform bill will impact charitable giving. If SALT deduction partially is calculated as charitable giving, it will artificially inflate the amount of reported charitable donations, and fail to reflect the actual amount of revenue dollars, flowing into the nonprofit sector. This would make it very difficult to understand if tax reform increased, decreased, or did not change charitable giving.
Independent Sector will continue to monitor this issue and we will share developments and additional information as it becomes available. If you have any questions, please let us know.