Tax reform could affect charitable giving
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Giving by individuals accounts for nearly three-quarters of charitable giving in the United States, over $280 billion in 2016. Changes to the 2018 tax policy could impact these contributions because of the effect on the incentives individuals and households face when making the decision of how much to give to charity. Prior to 2018, the U.S. tax code currently encouraged charitable giving by individuals who itemized their expenses to exceed the standard deduction.
Recent tax reform leaves the charitable deduction in place. However, the reform also doubles the value of the standard deduction used by two-thirds of Americans, to $12,000 for individuals and $24,000 for married couples. That means many taxpayers who now itemize deductions will find it’s no longer beneficial for them do so. They’ll find that the deductions they normally take, including for charitable giving, don’t add up to as much as the new standard amount. As a general rule, reductions in tax incentives will reduce donations.
According to the Congressional Joint Committee of Taxation, tax reform for 2018 will likely lead to sharp reductions in charitable giving because it will reduce the number of Americans who itemize their taxes from 33 percent of all taxpayers to just 5 percent. The Committee estimated that those Americans account for nearly $100 billion in itemized charitable gifts. Research shows that this change will result in a decline of giving between $12—$20 billion per year, according to separate research from the Independent Sector and the Lilly Family School of Philanthropy, and the Tax Policy Center.
A Colorado Nonprofit Association analysis of 2015 Colorado tax data suggests that most Colorado taxpayers with incomes under $200,000 will save more on taxes by taking the increased standard deduction, leaving no federal tax benefit for them to increase their giving. These taxpayers contributed $1.8 billion of the $3.9 billion given in Colorado. Thus, Colorado’s charitable giving could be reduced by as much as $250 million per year.
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Mike Geiger, president and CEO of the Association of Fundraising Professionals, reminds nonprofit organizations and fundraisers that it’s important to keep an optimistic tone and perspective by reminding potential donors that they are still making a difference and changing the world. Donors need to know about the obstacles nonprofit organizations face but not become overwhelmed with negative images.
Local Professional Fundraising Consultant, Robin Thompson, advises nonprofit clients to remain positive about what has not changed:
• The Vail Valley has historically had very generous donors with high capacity which indicates that they will probably continue to itemize and therefore the 2018 standard deduction should not affect their charitable giving.
• Some donors may look at the standard deduction in terms of “extra” money that they can give to nonprofits. For instance, if last year they itemized and only had $10,000 worth of deductions. Now, they will be given $24,000 and have extra dollars to support nonprofit organizations.
• Philanthropic people will continue to give. Many of them give because of the mission of the organization and knowing that they are making a difference. Tax deductions may provide an incentive, but it isn’t the only reason people give.
The bottom line is that nonprofit organizations must prepare for this potential drop in revenue. They need to be sure they have effective fundraising systems in place and that their staff and board are trained in development best practices. Their strategic direction must also be clearly articulated so that all efforts are focused in areas critical to their mission and constituents. Consult your tax professional for specific tax guidance and direction.
Robin Thompson, MS, is a Vail based consultant who has helped over a dozen local nonprofit organizations raise more money faster. She is also a professional speaker conducting workshops and trainings in the workplace on leadership, teamwork, and excellent service.