Since sweeping changes to the federal tax code were signed into law in December, experts have speculated how they will influence how, when, and how much donors give to nonprofits in 2018 and beyond. The Chronicle of Philanthropy has called tax reform a “destructive tsunami…about to pound the nation’s nonprofits and foundations.”
A leading worry is that the doubling of the standard tax deduction (from $6,350 to $12,000 for individuals and from $12,700 to $24,000 for married couples), combined with lowered tax rates for some tax brackets, will dramatically depress charitable giving, since only tax filers who itemize are incentivized to write-off their donations.
The Indiana University Lilly Family School of Philanthropy predicts individual giving will fall by up to $13 billion per year, as upwards of 30 million taxpayers who formerly itemized are expected to take the new standard deduction. Meanwhile, the Council on Foundations projects a drop in charitable donations of between $16 billion and $24 billion per year.
But how will changes in charitable giving impact foundations? Many foundations count on contributions to grow their endowments and, in turn, their grantmaking capacity. If individual donations decline, will grant makers be in a financial position to fill the gap? Anticipating the effect on foundations begins with understanding how the increased standard deduction may change overall giving patterns.
Impact on Individuals
- Are donors that selfish? Will individuals really be less generous towards their favorite nonprofit organizations if they don’t personally benefit at tax time? The data suggest donors are less altruistic than we might believe, since itemizers are more likely to be charitable. Some simply won’t be able to “afford” to give as much as they did before. A 2017 study from the Lilly Family School of Philanthropy found that “83% of itemizers reported donating any amount of charitable giving at all, compared to 44% of non-itemizers. In fact, non-itemizers contribute less than 20% of total giving.”
- The new standard deduction doesn’t affect all donors equally: The tax bracket most impacted by the increased standard deduction will be households earning between $75,000 and $200,000 a year; more than half these filers itemized under the old tax code, but will likely now take the standard deduction. The increased standard deduction is irrelevant to wealthy households, whose itemized deductions will still exceed the standard amount. In fact, other changes in the tax bill will actually increase the deductions that wealthy donors are allowed: repeal of the Pease Rule removes the cap on itemized deductions that upper-income taxpayers can claim.
Impact on Organizations
- Changing giving patterns will introduce budget uncertainty: Some filers may choose to “bunch” their charitable contributions. Rather than give smaller sums each year, they’ll pool their giving into larger sums every other year or every few years, so they have enough to itemize. This solves a problem for the donor, but leaves organizations with an inconsistent stream of annual donations and creates more holes that foundations may be asked to fill.
- Some nonprofits will feel it more than others: Donors on opposite ends of the wealth spectrum tend towards supporting different types of causes: large nonprofits, like universities, museums, and hospitals, are favored by the wealthiest donors, while ordinary Americans donate more to local charities, social service agencies, and religious organizations. The organizations most likely to be hurt by a disproportionate decline in giving by middle-income donors are those that meet local needs and serve vulnerable communities.
Impact on Foundations
Foundations may face a perfect storm, if individual donations fall at the same time that federal grants and contracts, and state and local budgets, are reduced or even cut. The Republican-controlled Congress has plans to slash federal funding for health and human services programs and federal entitlement programs like Medicaid, Medicare, welfare, and social security.
Nonprofits that feel the pinch, especially those that address human needs in local communities, may lean more heavily on foundations to meet their shortfalls. What will tax reform mean for foundations and their ability to respond to a greater need from their grantees?
Giving to foundations is mainly the domain of the wealthy: along with universities and healthcare organizations, the ultra-wealthy tend to reserve their transformational gifts for community and family foundations. The four largest philanthropic gifts made in the U.S. in 2017 were to foundations, three that topped $1 billion.
Since foundations rely mostly on gifts from wealthy donors, and these high-income tax payers will still be incentivized under the new tax law to itemize, it seems safe to expect that outright giving to foundations will not be affected, at least in the short-term.
There are, however, provisions of the tax bill that could negatively impact foundations in the longer-term. One is the doubling of the estate tax threshold. Estate tax was previously levied on estates worth more than $5.49 million for individuals, or $10.98 million for married couples, and has increased under tax reform to $11 million for individuals and $22 million for couples.
This leaves very few wealthy taxpayers who will have reason to use charitable giving and bequests to reduce their estate tax liability and lower their overall tax bill. Over time, foundations could see a decrease in bequests as a result.
It stands that at least in 2018, nonprofits should be less concerned that foundations will suddenly have reduced grantmaking power, and more conscious of increased competition for grant dollars as organizations “must compete in the narrowing pool of contributions.”
What can organizations do?
- Talk with individual donors: Have conversations with your closest major donors to learn if they anticipate changing their giving through their family foundations or personal finances, so you can be prepared to shift fundraising plans and goals. More individuals are expected to give through donor advised funds, so ask your donors about all the ways they would be willing to give. If you have connections with tax advisors or financial planners, organize informational sessions or offer free, brief private consultations for your donors.
- Shore up your funder stewardship: Go beyond making sure you submit grant reports on time. Deepen the relationships and trust you have with funders. Showcase stories and examples of the difference their grants have made in people’s lives and what the loss of their support could mean to the community you serve. Meet with them not just to share your concerns about changes under tax reform, but to understand theirs.
- Be alert to changing priorities: Some funders are shifting their grant making focus in order to protect the weakening social safety net or fill other gaps that are opening, especially as government grant programs come under threat of being gutted. Pay attention to any changes announced by your current grantors and new funding opportunities that could benefit your organization.
- Seek out new sources of support: The more diverse your organization’s revenue sources, the better you can weather funding fluctuations. This may be the time to invest in grant prospect research to identify new prospective funders and build a grants game plan. See our tips for finding funders most likely to fund your nonprofit or contact Grants Plus about our comprehensive Funding Scan.
- Engage your staff and board: Ensure your board and staff members are aware of the possible implications of tax reform. Discuss the potential scenarios and risks your organization may face and the proactive steps you can take to mitigate them. You can start by sharing this post.
Above all, keep telling your organization’s story and illustrating the impact of your mission at work. Especially as tax reform weakens incentives for charitable giving, now more than ever is the time to engage and educate your donors and funders about the need for their support and the difference that they make.
