Charitable giving is ingrained in American culture. But in the wake of the Tax Cuts and Jobs Act (TCJA), many in the nonprofit world are worried about the future of donations and, in turn, the longevity of nonprofits. So how will the first major update to the tax code since 1986 impact giving, and what tax strategies can donors use?
Anticipated Effects of the TCJA
Since the 1970s, gifts to charity have consistently equaled about 2% of our country’s GDP, regardless of the economy or politics. Even with such a stable history, some in the nonprofit sector are concerned that tax reform will reduce charitable giving by a noticeable degree.
The legislative change expected to have the biggest impact is the increase in the standard deduction. Pre-TCJA, 33% of taxpayers itemized their deductions. Post-TCJA, this number is expected to drop to 14%. With fewer people itemizing, the argument goes, fewer people will have a tax incentive to donate.
Will the loss of a tax deduction really stop people from donating? Perhaps, but it may not have as big of an impact as one would expect. The top 1% of earners contribute 33% of the individual donations across the country, and 18% of charitable contributions come from individuals who don’t itemize at all. These populations are expected to continue donating, regardless of the legislation.
On the other hand, some provisions of the TCJA could actually encourage an increase in charitable donations, including the:
State involvement is another wild card. Because the future of giving remains uncertain, many states have decided to tackle the issue on their own.
Some, for example, are considering offering a payroll tax credit for charitable donations rather than an income tax credit. Others are discussing a system whereby individuals will receive a voucher based on the value of their donation that they can use to offset state taxes. Still others are supporting federal legislation such as the proposed Charitable Giving Tax Deduction Act, which would make the charitable deduction an above-the-line deduction, providing even more powerful tax benefits to donors. Whether any of these ideas will materialize into actual legislation remains to be seen, however.
Donor Tax-Planning Strategies
Donors want to know about how the tax law changes will affect them and what strategies they can use to allow them to continue donating. Although you should never give donors tax advice, as long as your discussions are framed as a way for them to support the cause that they are passionate about, your organization should be on safe footing.
While there is no one strategy that will work for everyone, a few techniques that donors can consider to maximize their charitable tax deductions are:
Don’t Discount Personal Motivations
Let’s not forget the most important reason why people donate: They care about the cause. Speaking on a panel at the 2018 Armanino Nonprofit Symposium, JP Morgan wealth advisor Stephanie Zaffos recommended nonprofits tap into givers’ personal motivations by showing them what the community would be missing without the nonprofit’s services. Social media can play a great role in this area. A 30-second video that gets to the heart of the problem can tap into individuals’ motivations and encourage even more giving.
She urged charities to stay agile and find ways to stay relevant by doing something a bit more forward-thinking. For example, accepting Bitcoin donations or allowing individuals to use their credit cards at a donation kiosk might rekindle donor enthusiasm. “People like to talk about what’s cutting edge and what’s new,” Zaffos said.
Optimistic Outlook
Although donations may fluctuate as donors figure out their new tax strategies, charitable contributions are unlikely to take a major hit because of the TCJA. The bottom line is that good donors will remain good donors, even without the tax incentive. Donors know, said Zaffos, that these days, “it’s actually more important than ever for people to give [more] and not to give less.”
August 24, 2018