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Tax Reform Is Here. Now What?
Published in INSIGHT - Spring 2018
The federal tax code just got a makeover, and many would argue it was long overdue.
Before the law commonly known as the “Tax Cuts and Jobs Act” was passed by Congress in late 2017, the last comprehensive overhaul to the federal tax code was back in 1986—when Top Gun was film of the year and Ronald Reagan was president!
So, now that tax reform is here, what exactly does this mean for our churches and how should we as administrators respond?
Let us start with five of the top tax reform takeaways:
1. Tax Withholding Updated
First, some good news. By the time you are reading this article, you should have already checked off your to-do list updated income tax withholding.
As of February 15, 2018, employers must begin using the updated IRS income-tax withholding rates based on the newly reduced individual tax rates and other tax reform changes. (See IRS Notice 1036 if you need a refresher.)
2. Charitable Giving Changes
Not surprisingly, one of the top questions we have been asked at ECFA lately is “How will tax reform impact charitable giving?”
It is certainly a wise question to ask, but the truth is no one knows for sure. Here are at least some clues and considerations.
Thankfully, the charitable contribution deduction was not directly eliminated or limited by tax reform; however, the near doubling of the standard deduction (now $24,000 for taxpayers Married Filing Jointly) means that significantly fewer Americans will be able to claim a charitable deduction because only those who itemize can claim the deduction. Also, the new lower tax rates starting in 2018 will mean less of a tax savings from giving by those who continue to itemize deductions.
On the other hand, the reduction of the corporate tax rate will provide additional resources to every corporation that has taxable income. The changes in the individual tax rates will also provide additional resources to many taxpayers. Where these additional resources are available because of tax reform, there is an opportunity to use some of these funds for charitable giving purposes.
Looking back on history, we can also see from the last tax reform in the mid-1980s that when taxes were cut, average giving continued to trend upward in the years following despite predictions of a major downturn.
Finally, even with fewer tax incentives under the new law, it is still important to remember that givers in the faith community are most motivated to give by our mission to share the Gospel and by what the Bible teaches about generosity. The tax benefits, while certainly helpful, are secondary to many givers, so hopefully that is better news for churches and other Christian nonprofits.
3. Unreimbursed Business Expense Deduction – Gone
Under 2017 law, it was a significant income tax advantage for church employees to have their ministry-related expenses reimbursed by the church. The reimbursements needed to meet the requirements of an accountable expense reimbursement plan. Simply stated, a tax-free expense reimbursement put an entire dollar back in the employee’s pocket whereas an itemized deduction on Schedule A only put a fraction of the dollar back in the employee’s pocket.
Now 2018 brings us to a new world for unreimbursed business expenses. The employer-related business expenses that are not reimbursed are simply not deductible at all for income tax purposes. This is because the Miscellaneous Deductions section of Schedule A has been totally eliminated.
So, now the importance of reimbursing an employee’s church-related business expenses is vital. Without a tax-free reimbursement under an accountable plan, employees will not recoup any of these expenses.
4. Moving Expense Deduction – Gone
The deduction or tax-free payment of moving expenses was a pretty sweet deal. It was – past tense – because these benefits all went away on January 1, 2018.
Previously, an individual could take an above-the-line tax deduction subject to a couple of requirements if he moved for a new principal place of work. The Tax Cuts and Jobs Act eliminates that deduction (except for members of the Armed Forces).
Employers were also able to pay moving expenses directly to vendors, or through reimbursements to employees, for required moves meeting certain criteria and there was no tax impact on the employee. Now, if these amounts are paid, they will be included as taxable income on the employee’s W-2 form. Churches may want to consider grossing up the taxable benefit to help reduce the tax consequences for employees.
5. Honorable Mentions (What Did Not Make the Cut)
While tax reform brought extensive changes, there were a host of proposals left on the cutting room floor. Here are just some of the proposed tax law changes that did not make it to the final bill:
Reducing the cap pretax 401(k) and 403(b) contributions. While this concept did not make it into either the Senate or House bill, there was serious consideration of placing the annual limit for these pretax contributions as low as $2,400. Some tax reformers had even advocated eliminating pretax retirement plan contributions. >
Repeal of the exclusion for qualified tuition reduction plans. Under current law, employees of certain educational institutions may exclude qualified tuition reduction from taxable income. This includes employer-provided tuition reductions for the employee and their dependents. These tuition reductions may be in the form of tuition remission, tuition waiver, or a tuition grant. Under the House bill, these qualified tuition reduction benefits would have become taxable. This would have negatively impacted Christian K-12 schools and colleges and universities. Thankfully, this provision was not enacted.
The House version of tax reform would have adjusted the charitable mileage rate for inflation but this provision was not in the final legislation.
Repeal of the exclusion for employer-provided educational assistance programs. Under current law, employees may exclude from income up to $5,250 per year in educational assistance at the undergraduate and graduate level regardless of whether the education is related to his or her job. Under the House bill, the payments would have become taxable. This provision was not enacted.
Elimination of the exclusion for employer-provided dependent care assistance programs. Under current law, an employer can develop a dependent care assistance program under which employees can exclude employer payments from income, subject to certain limitations, if the expenses would be employment-related for child care credit purposes if they were paid to the employee.
So, we can readily see that there were many possible changes to the tax law that did not make it to the finish line in The Tax Cuts and Job Act of 2017.
The five tax reform takeaways we’ve considered here were just a few of the many changes from the Tax Cuts and Jobs Act that are already impacting churches, their leaders, and givers beginning in 2018.
Visit ECFA’s free resource community at www.ChurchEXCEL.org for more practical helps, including articles, eBooks, and webinars to stay up to speed on all the latest tax reform and other developments.
Michael Martin is vice president of ECFA (Evangelical Council for Financial Accountability), an organization that certifies churches and ministries for financial integrity. Connect with Michael on LinkedIn or follow him on Twitter @MichaelECFA.