Tax Changes and Giving Trends to Watch in 2018
Much has been written about recent changes to the tax code and how they could affect philanthropy. Many forecast decreases, sometimes in the billions, for charitable giving. There are both positive and negative aspects of the tax bill when it comes to fundraising, and the overall impact will depend on which effects outweigh the others. Here are a few keys to watch:
- The largest impact on midlevel donors. The largest change to the tax code affecting fundraising is the doubling of the standard deduction. While the deduction for charitable giving remains, the number of people who itemize their taxes and thus realize the tax benefits of making a donation, is estimated to drop from 30 percent to 5-10 percent. The good news is this likely won’t impact your top-level donors, who will still fall into the 5-10 percent who itemize. It will also have little effect on lower-level donors, who will continue to simply take the standard deduction. The largest impact will be felt by those who move from itemizers to taking the standard deduction. Keep an eye on your organization’s gifts falling in the 25th to 75th
- More volatility in giving. Because of the aforementioned changes to the standard deduction, some donors may choose to concentrate their gifts in one year versus spreading them out over a pledge period. As an example, a donor who wants to make a $50,000 campaign gift may choose to pay the entire gift in one year, itemize their tax return and take the charitable gift deduction in the year the gift is made. Spreading the gift out over five years may not get them to the threshold for itemizing, forcing them to take the standard deduction and thus eliminating the tax benefit of the gift. These changes may also accelerate giving to donor-advised funds, encouraging donors to make large contributions to their funds and receiving tax benefits in one year, and simply making distributions from their funds in other years. This effect may create large fluctuations in giving from year to year.
- Increases in discretionary income. While the decrease in those who itemize their taxes will have some negative effect on charitable giving, it is also estimated that many Americans will see an increase in their take-home pay. Many studies have shown a correlation between discretionary income and charitable giving—how much will donors (and which donors) increase their giving with more dollars in their pocket? Some companies, like Wells Fargo, have also signaled they will increase their philanthropic giving due to the reduction of the corporate tax rate.
- Changes in the estate tax. One of the less publicized aspects of the new tax plan is the doubling of the estate tax provision (from $5.1 million to $11.2 million for individuals, and $22.4 million for couples). This only affects high-capacity donors but is worth discussion as you steward existing estate gifts or ask for new ones
In short, there are pieces of the new tax bill that could both increase and decrease charitable giving. While there seems to be more that would discourage giving, the ultimate question will be how much deductions actually incentivize giving. Although studies have shown this is often relatively low on the list of reasons donors give, the next few years will show how true that actually is.
Shocking Statistic: According to Forbes, the new tax bill will decrease the number of taxable estates from 5,000 to 1,800 in 2018.