When it comes to charitable support in Alabama, higher education typically takes the prize for biggest gifts. But most giving is local, which is why ministry leaders are keeping a positive attitude in light of this year’s changes to federal tax policy.
Charity Navigator reports that nearly one-third (31 percent) of all donations given in the U.S., approximately $127.37 billion, is given to religious groups each year. That makes Americans among the most generous people in the world, according to the 2017 World Giving Index.
Alabamians are generous as well. In a WalletHub report of the most charitable states in 2016, Alabama ranked 5th overall in charitable giving.
Americans give because they believe in the organizations and the causes made possible by their gifts, said Lee Wright, coordinator of church compensation services for the Alabama Baptist State Board of Missions (SBOM). Giving is actually up this year, Wright said, citing information from the Evangelical Council for Financial Accountability (ECFA) that shows steady increases in giving to Christian ministries over the past few years.
Some experts are concerned that the federal Tax Cuts and Jobs Act (TCJA) passed by Congress and signed by President Donald Trump in December 2017 will have a negative impact on charitable giving. Wright hopes that is not the case.
“The average charitable giving of Christians has been in the 2 percent category for some time,” Wright said. “But it’s been slightly higher this year, and many believe it’s because of the improved economy. We trust Christians will continue to give from conviction rather than for tax benefits, and I believe they do give for the right reason.”
The TCJA made changes to corporate tax rates, but the most significant changes of the law for the average taxpayer relate to personal income taxes. Here are three major changes:
- The law keeps the seven income tax brackets that were in place, but lowers tax rates within those brackets. For example, the income tax rate for a single filer earning $38,700–$82,500 per year would have been 25 percent in 2017.
In 2018 the rate will be 22 percent. Employees have seen this reflected in the change in withholding rates from their paychecks since February 2018.
- Personal exemptions are eliminated. Before the TCJA, taxpayers subtracted $4,150 from income for each person claimed. That’s gone but the maximum child tax credit was raised from $1,000 per child to up to $2,000 per child for dependent children under the age of 17 at the beginning of the tax year.
- The standard deduction in 2018 is nearly double what it was in 2017. For single filers the standard deduction increases from $6,350 in 2017 to $12,000 in 2018. The deduction for married and joint filers increases from $12,700 to $24,000. By most estimates, some 95 percent of Americans will probably take the standard deduction for 2018 — up from 70 percent in 2017.
Itemized deductions are still allowed, including those for retirement savings, student loan interest, and medical expenses. Itemized deductions for charitable giving also remain in place, and in fact, the charitable giving deduction limit is now 60 percent of adjusted gross income, up from 50 percent in 2017.
However, the higher standard deductions mean most taxpayers will not give enough to charity to exceed the standard deduction, therefore eliminating their incentive to itemize.
Itemized deductions
It just may not make sense for most taxpayers to claim these deductions, Wright said.
“Most of the familiar itemized deductions are still there, but the overwhelming majority of us will not be able to deduct them,” he said. “Mortgage interest, medical, property taxes and charitable giving will have less importance for most Americans tax-wise.”
Wright suggests taxpayers continue to keep track of receipts for potential deductions, at least through the end of 2018, to see how their individual state and federal tax liability shapes up. Those receipts should keep coming, since nothing has changed for ministries and organizations in terms of receipting and acknowledging gifts.
At the federal level, proponents of the charitable giving deduction are working to reinstate a charitable deduction for those who may no longer be able to itemize. Moves are underway to separate the charitable deduction from the IRS’s Schedule A form, which is used to report itemized deductions. (See ‘Proposed changes,’ below.)
The upside of the tax changes is that most Americans are probably already seeing a little more money in their paychecks and many may receive a bigger refund when their 2018 taxes are complete. And churches may see more financial benefits than other organizations as a result, Wright said.
“Churches may be in better shape than other charities due to strong convictions about stewardship and giving.”
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Wage growth stagnant for most American workers
New tax rates for 2018 mean many Americans are bringing home a little more money each paycheck, but those dollars don’t necessarily translate into higher purchasing power.
Despite some ups and downs over the past several decades, today’s real average wage, the wage after accounting for inflation, has about the same purchasing power it did 40 years ago, according to a recent report by Pew Research.
Americans’ paychecks are bigger than they were in 1978, but after adjusting for inflation, today’s average hourly wage has just about the same purchasing power it did back then.
A similar measure — the “usual weekly earnings” of employed, full-time wage and salary workers — suggests the same. In seasonally adjusted current dollars, median usual weekly earnings rose from $232 in the first quarter of 1979 to $879 in the second quarter of this year. That may sound like a lot, but in inflation-adjusted terms, that $232 in 1979 had the same purchasing power as $840 in today’s dollars.
Benefit costs have risen faster than wages in recent years as well, leading to speculation that employers may be unable or unwilling to raise wages to cover the rising costs of health insurance, retirement account contribution, tuition reimbursement and other benefits that might be part of an employee’s compensation.
Stagnant wage growth comes during a time when many economic indicators are on the rise in the United States. Unemployment numbers are low (3.9 percent as of July) and employers have been adding jobs for 101 straight months, Pew reported.
But Americans are still feeling the weight of economic concerns. The 2017 American Family Survey reported last November that two-thirds of Americans cite economic issues as one of the three most important issues facing American families. (TAB)
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Proposed changes could allow for more itemized charitable donations
The increased standard deduction in 2018 put into place by the 2017 Tax Cuts and Jobs Act (TCJA) could mean that as many as 95 percent of Americans will claim the standard deduction rather than itemize when they file their federal income taxes, up from 70 percent of tax filers in 2017.
Concerned about what this might mean for nonprofits and churches, Rep. Mark Walker, R-N.C., an ordained Southern Baptist pastor, has introduced a bill in the U.S. House of Representatives to amend the Internal Revenue Code “to allow above-the-line deductions for charitable contributions for individuals not itemizing deductions.”
In the face of predictions that charitable giving in 2018 will go down anywhere from $11 billion to $20 billion as a result of the new tax law, many are hoping to see some form of universal charitable deduction separate from itemizing enacted.
‘Fair and efficient’
Jason Lee, chair of the Charitable Giving Coalition, an organization whose mission is to protect the tax deduction, says a universal charitable deduction is “a fair and efficient resolution that will continue to encourage Americans to redirect their dollars to charities.”
A universal charitable deduction would not only help recoup the anticipated loss of charitable contributions but would also promote fairness by allowing all taxpayers to deduct their contributions, Lee said in a statement online at www.ProtectGiving.org.
Another little-known provision of the new law is a parking tax that requires churches and nonprofits to pay a 21 percent tax on fringe benefits such as employee parking. Tax experts say churches can either pay taxes on the value of employee parking or pass the burden to employees by making it a part of their taxable income.
The National Council of Nonprofits — the nation’s largest network of charitable organizations — called on the IRS and Treasury Secretary Steven Mnuchin’s office to delay implementation of the tax on fringe benefits for a year to give the nonprofit sector time and guidance to fully understand its obligations. (RNS, Carrie Brown McWhorter contributed)
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New federal tax laws may affect ministers, church staff
By Michael J. Brooks
Correspondent, The Alabama Baptist
The federal Tax Cuts and Jobs Act (TCJA) that took effect on Jan. 1, 2018, will most likely change the way many Americans, including ministers, file their taxes.
“Tax law hasn’t changed substantially since 1986, but this bill does change several of the things we’re accustomed to,” said Lee Wright, coordinator of church compensation services for the Alabama Baptist State Board of Missions (SBOM). “It affects individuals, of course, but also our churches and ministers. Most ministers should pay less federal tax, but a few might pay more.”
Wright was one of several presenters at the Summit for Church Leaders held Aug. 3–4 at Shocco Springs Baptist Conference Center in Talladega.
One downside for ministers is the elimination of employee non-reimbursed business deductions on Schedule A. Ministers have been able to deduct business expenses in the past on Schedule A, after subtracting 2 percent of their adjusted gross income.
“So the ‘package approach’ is now dead,” Wright said. “Many churches customarily tell their ministers that they offer a package and let the minister divide it as he chooses. But the minister can lose money on business expenses that decrease his actual salary.”
Wright said the better approach is to offer three categories: compensation, benefits and accountable business expenses for ministers.
“An accountable plan means the minister must turn in receipts for business expenses and be reimbursed,” he said.
“This way the money isn’t reported and there is zero tax. It’s how businesses have dealt with expenses like this for many years, and our churches need to do the same.”
Self-employment income
Wright said ministers may have some self-employment income from revivals, weddings and the like, and attendant expenses can be listed as deductible business expenses on Schedule C.
Another loss for ministers is the unusual double deduction they have enjoyed on housing allowances. Mortgage interest and property taxes can be part of a minister’s housing allowance that is sheltered from federal income tax though reported as self-employment income.
Until now the mortgage interest and taxes could also be included as an itemized deduction for federal taxes. However, the higher standard deduction may make this double deduction a relic for most ministers.
“Part of the uniqueness of ministers’ taxes is that they’re considered employees for federal tax purposes, and self-employed for Social Security taxes,” Wright said. “This means that ministers pay the 15.3 percent self-employment tax rate.”
Wright said the new tax act also removed the deduction for moving expenses, so if a church pays or reimburses a minister for moving, the amount is considered taxable income.
Wright noted that in late 2017, the national media focused on long lines in Northeastern states as people came in to pay property taxes early.
“They did this because their property tax deductions were about to be capped,” he said. “This isn’t really a major consideration for Alabama since our property taxes are lower. But we do need to keep in mind that Alabama tax law does allow generous deductions.”
State law
“Taxpayers need to compute medical expenses, charitable giving and the like for state taxes. It may be that state law will change one day to reflect the current federal law, but it hasn’t yet.”
Churches or ministers who would like more information on the impact of the new tax policy on ministry staff can contact Wright in the office of LeaderCare and church health by phone at 334-613-2241 or by e-mail at lwright@alsbom.org.
To find a guide detailing the best practices for churches visit www.Guidestone.org/CompensationPlanning.
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