Paul Yeghiayan, CFRE
Senior Consultant
Federal policies and legislative proposals can significantly affect nonprofits’ mission, operations, and service impact. Nonprofit staff and board leaders who pay attention to the shifting federal policy landscape can better anticipate and, when possible, strategically position their organizations to adapt accordingly. Congress is deliberating various policies and proposals that may influence charitable giving. Read on for an examination of these pending changes and for actionable insights nonprofit leaders and fundraising professionals can take to navigate them.
Tax Policy and Charitable Giving Incentives
For nonprofits that heavily rely on annual donations—rather than large government grants, contracts, or significant endowments—charitable contributions are critical. Tax benefits rarely rise to the top of people’s reasons for financially supporting a charitable organization; however, tax policies do affect giving, particularly deferred and estate giving. Here are several pending federal proposals that may reshape the tax landscape for nonprofit organizations:
- Universal Charitable Deduction: Efforts are underway to make the temporary universal charitable deduction introduced during the COVID-19 pandemic permanent. Current pending bipartisan legislation known as the Charitable Act (H.R. 3435/S. 566) seeks to incentivize charitable giving by allowing nonitemizers to deduct up to one-third of their standard deduction. Should the Charitable Act be made into law, it would enable single filer nonitemizers to deduct approximately $4,615 and married filing jointly nonitemizers to deduct $9,233. The Charitable Act could increase people’s interest in giving and help address the decline in the number of people contributing to nonprofits.
- Revisions to Donor-Advised Funds (DAFs): Donor-advised funds allow individuals to set aside money for future charitable contributions. Proposals to address DAF regulations, such as the Accelerating Charitable Efforts (ACE) (S.1981), seek to expedite the distribution of funds to operating nonprofits while increasing transparency. Key measures include setting minimum payout requirements and stricter reporting standards. ACE proponents believe these changes will get funds to nonprofits faster and potentially promote fairer distribution of philanthropic dollars to smaller and grassroots nonprofits. Opponents of ACE argue that stringent distribution timelines and administrative burdens could reduce donor autonomy and discourage donors from using DAFs, thereby contributing to the decline in the number of people supporting charitable organizations.
- Reduction of the Estate Tax Exemption: Under the 2017 Tax Cuts and Jobs Act (TCJA), the estate tax exemption was doubled, allowing individuals to exclude up to $12.92 million and married couples up to $25.84 million, respectively. With the TCJA provisions slated to expire in December 2025, the estate tax exemption will revert to pre-2018 levels. A lower exemption will subject more estates to estate tax, increasing the incentive to make charitable bequests to reduce taxable estate values. Wealthy individuals may adjust estate planning strategies to include more philanthropic donations as a way to reduce estate tax liability. The uncertainty around future tax policy may encourage some individuals to act before changes take effect, which could lead to a surge in lifetime giving.
- State and Local Tax (SALT) Deduction: A significant tax-related issue is the state and local tax (SALT) deduction cap introduced under the TCJA. The current SALT cap, set at $10,000, limits the amount taxpayers can deduct for state and local taxes, thereby disproportionately affecting residents in high-tax states. Currently, bipartisan support for proposals to eliminate or raise the SALT cap has gained momentum in Congress. Nonprofits, especially those operating in high-tax states, have a vested interest in this issue as the SALT cap reduces disposable income for many donors, potentially impacting their charitable giving. Removing or adjusting the SALT cap could alleviate this burden and restore a more favorable financial landscape for donors, thereby benefitting nonprofit fundraising efforts.
- Endowment Taxation: The TCJA also introduced a 1.4% excise tax on the net investment income of private colleges and universities with at least 500 students and endowment assets exceeding $500,000 per student. Currently, there are proposals to increase this endowment excise tax rate substantially. Notably, Vice President J.D. Vance has suggested raising the tax to 35%, arguing that large endowments have grown significantly due to taxpayer subsidies and that this growth has insulated colleges from external pressures. Critics, however, contend that taxing large endowments would stifle innovation, reduce financial aid, and undermine the very mission of educational institutions, particularly as endowments are often earmarked for scholarships, research, and long-term sustainability. It’s unknown what the future holds for current and proposed endowment taxes. What is clear is that such proposals reflect a political trend toward scrutinizing the financial practices of higher education institutions and reallocating resources to align with specific policy objectives.
Actionable Insights
Keep informed.
Continue monitoring developments in federal tax policy and consider supporting the advocacy work of organizations such as the Association of Fundraising Professionals, the Charitable Giving Coalition, and The Nonprofit Alliance, among others, who work to promote favorable legislative outcomes.
Be Prepared.
Should federal tax policy changes occur, be prepared to address donor concerns and adapt strategies and opportunities to align with evolving tax incentives.
Stay Connected.
Regarding potential estate tax changes, engage with your high-net-worth donors and their trusted advisors to understand the potential benefits they may incur from making charitable contributions under changing tax law.
Conclusion
The policy and legislative environment for nonprofits in the United States is in flux, presenting challenges and opportunities. By staying informed and engaging in advocacy, when appropriate, nonprofit leaders can help shape policies that support their missions and strengthen the sector. Strategic planning, collaboration, and adaptability will be essential for navigating this dynamic landscape and ensuring the continued impact of nonprofit organizations.
Bibliography
“The 2025 Tax Debate: Individual Estate and Gift Taxes in Tcja.” Bipartisan Policy Center. Accessed January 24, 2025. https://bipartisanpolicy.org/explainer/the-2025-tax-debate-individual-estate-and-gift-taxes-in-tcja/.
Changes to the state and local tax (SALT) deduction – explained. Accessed January 24, 2025. https://smartasset.com/taxes/trumps-plan-to-eliminate-the-state-and-local-tax-deduction-explained.
S.1981 – 117th Congress (2021-2022): ACE act | congress.gov | library of Congress. Accessed January 24, 2025. https://www.congress.gov/bill/117th-congress/senate-bill/1981.
S.3514 – a bill to amend the internal revenue code … Accessed January 24, 2025. https://www.congress.gov/bill/118th-congress/senate-bill/3514.
S.566 – 118th Congress (2023-2024): Charitable act. Accessed January 24, 2025. https://www.congress.gov/bill/118th-congress/senate-bill/566.
Sjanifer. “Hundreds of Nonprofits Push for Passage of Charitable Act.” Thomson Reuters Tax & Accounting News, December 17, 2024. https://tax.thomsonreuters.com/news/hundreds-of-nonprofits-push-for-passage-of-charitable-act/.
Taylor, Kelley R. “Salt Deduction: Three Things to Know for 2025.” Kiplinger.com, September 18, 2024. https://www.kiplinger.com/taxes/salt-deduction-things-to-know.
