Interpreting the Revised Tax Law: A Breakdown of the Impact on Your Fundraising Plans
The tax code has changed. What does that mean for you and your ability to fundraise?
The new tax law officially went into effect on Jan. 1, 2018. Here’s how we at CampaignCounsel.org believe the new law could impact the nonprofit sector and how we think nonprofit executives and volunteers should approach these new challenges.
People don’t give to charity only to get a tax deduction. Millions of non-itemizers contributed each year under the old tax law and many will continue to do so under the new. However, we must accept there is a real possibility that individual giving behavior will evolve and be influenced by the tax law change. Now is the time to evolve with your donors.
The increase in the standard deduction leads to the percentage of taxpayers itemizing charitable gifts dropping by more than half, to about 16 million, according to the Washington-based Tax Policy Center (TPC). It's estimated that the charitable deduction will be out of reach to more than 90 percent of taxpayers. Most will simply take the standard deduction, which offers no tax incentive for charitable giving.
The change also reduces the tax incentive to donate by increasing the after-tax price of giving, according to TCP. The new law reduces the average marginal tax benefit of charitable giving from 20.7 percent to 15. 2 percent. This means the after-tax cost of donating $100 in 2017 was just $79 ($100 - $21). The new law cuts the tax benefit to about 15 percent, raising the after-tax cost of giving in 2018 to $85 ($100 - $15).
On the upside, the limit for individual cash donations to public charities increases from 50 percent to 60 percent of adjusted gross income. Therefore, people who choose to itemize their charitable donations can deduct 10 percent more of their income.
Nonprofits may see a decline in gifts from 2017 to 2018, estimated at around 5 percent, for a variety of reasons. Donors who have depended upon the itemized deduction and donated accordingly now may take the standard deduction. Without the need to itemize deductions, these donors may see no reason to give. These donors, who generally account for smaller gifts and are often not benevolent givers, will impact annual giving to a greater degree than capital campaign giving. An end-of-year surge in 2017 also may reduce giving in 2018 as donors increased giving to take the deduction in 2017.
The changes are likely to have a greater effect on annual giving to nonprofits that depend on moderate-income households, generally including faith-based organizations and local community programs. Higher education and arts organizations may feel less of an impact due to their ability to attract and retain benevolent and high net-worth givers who will still itemize charitable deductions.
The impact of tax benefits has shown decline in recent years. Just 18 percent of wealthy donors said they gave largely because of tax benefits in 2015, compared with 34 percent of those who cited this as a motivation in 2013. In addition, three in four people and 63 percent of wealthy households indicate they are motivated to give because they “believe in the mission,” “want to give back to their community” and for “personal satisfaction,” according to the 2016 U.S. Trust Study of High Net Worth Philanthropy.
Americans consistently give around 2 percent of personal income, according to the Giving USA Foundation, and tax law changes are unlikely to impact that. If tax law creates more personal income, and Americans continue to give 2 percent, that should result in an increase in donated dollars. The overall economic outlook in the United States is healthy and continued growth is expected, leading charitable giving to simultaneously improve with average individual income and consumer attitudes.
Economic growth also should lead to grant-making foundations realizing higher returns. Therefore, they will have more funds to disperse.
Finally, history shows that the tax law changes of 1986 produced short-term ramifications, including a surge in 1985 giving followed by a decline in 1986, but that estimated long-term declines never materialized. Current changes are estimated to shrink giving by $13 billion or more each year, an impact that didn't materialize after 1986.
The message sent to donors during this time will be important. CampaignCounsel.org believes that most people who give, particularly to capital campaigns, do so because they care, are inspired and are motivated by altruism, not tax benefit. People give to people. People give because they are asked. Success depends on our ability to develop and create valuable relationships with donors.
If you are soliciting a prospect and the tax law comes up, acknowledge the impact it is having on donors, including how it is impacting you:
Yes, this is a real challenge that could affect how much money we raise. However, I (my family and I) are still supporting this project because…
Do not debate the tax plan during solicitations. Doing so can only hurt your ability to secure a gift. Instead, refocus the conversation on the needs and benefits of the project.
Messages might include:
We count on our committed donors to help us brave this storm. You have proven your support of our mission through your past generosity. Stay with us and help us be the nonprofit that doesn’t suffer these setbacks.
Our donors are typical members of our community who know the importance of fulfilling our mission, who are generous and who love our community. We believe our donors will continue to support us regardless of any tax law.
Do all that you can to support our mission. You believe in the power we each have to make the world a better place. Consider your gift carefully and make your biggest impact. Touch as many lives as you possibly can.
With a focus on the valuable relationships that ultimately sustain charitable organizations and messages that advance those relationships, we believe nonprofits will continue to serve and to grow upon the generosity of Americans.
Kevin Wallace is president of CampaignCounsel.org, specializing in capital campaign planning and management. Kevin has 20 years of fundraising experience, conducting more than 70 campaign planning studies and capital campaigns around the country that have raised more than $175 million. Reach him at email@example.com or visit www.campaigncounsel.org.