Luckily, the Internal Revenue Service provides a store of accurate and timely information about the wealth and income of America’s taxpayers. A recent article distributed by the IRS, entitled Individual Income Tax Returns, 2001 by David Campbell and Michael Parisi, offers some valuable insights into cur-rent financial trends. Although this report examines data from 2001, many of the issues relevant then continue to affect gift development efforts today.
The big picture
For tax year 2001, taxpayers filed over 130 million individual income tax returns. In that year, reported adjusted gross income (AGI) fell 3.1% from 2000’s level to $6.2 trillion. This was the first reported drop in AGI since 1949. Taxable income fell even faster—to $4.3 trillion, a drop of 6.1%. This decline is attributable to an increase in the amount of reported exemptions and deductions.
One of the primary reasons behind the drop in adjusted gross income is the stock market performance of recent years. Over the four-year period leading up to 2001, the amount of net capital gain reported on individual income tax returns had more than doubled. But after the stock market bubble burst in 2000, net capital gain saw a significant drop.
Tax year 2001 also saw decreases in other income components including dividends, IRA distributions, and taxable interest. Although salaries and wages increased slightly, they experienced the smallest increases since 1958. Notably, the only component of income that saw a significant increase was unemployment compensation, which increased 59% over the previous year.
While income levels decreased, both the number and total amount of itemized deductions increased slightly over figures from 2000. Itemized deductions were claimed on 34.2% of all individual income tax returns, and the average total for itemized deductions was nearly $20,000. All major component deductions increased, except for charitable contributions.
The charitable component
Though the number of returns claiming charitable contributions increased by almost two million persons to 39.4 million for 2001, the overall amount of charitable contributions claimed as itemized deductions fell 1% to $139.2 billion. This was the first decline in charitable deductions since 1987, when the non-itemizer charitable deduction provision was allowed to expire.
The authors of the report attribute the fall in charitable contributions itemized for 2001 to the 19.6% drop in contributions other than cash. During the 1990s, non-cash contributions increased sixfold, due in part to the increased value of stock market related assets. As the stock market fell, the non-cash component of charitable giving dropped by some $9.3 billion, with a resulting impact on overall contributions claimed by itemizers. On the other hand, cash contributions actually increased over figures from 2000 among those itemizing deductions.
Many of the financial factors that plagued tax-payers in 2001 continued in 2002 and 2003. A stock market recovery began in late 2003, however, and seems to have stabilized the market around the 10,000 level in recent months, which should bode well for gifts of appreciated assets. Because of the reduction in gifts of appreciated assets noted above, however, it may be especially important that nonprofits remind donors of the benefits of such gifts in light of increases in stock market values in recent months.
Most interest rates remain low, draining the incomes of those relying on interest-bearing in-vestments—typically retirees. However, those low interest rates do have a positive side, as they are helping real estate prices remain stable or even increase in many parts of the country. Lower interest rates also tend to cause bonds to increase in value. So although there has been little growth in individual income, asset values represented by real estate and securities remain high.
Implications for fundraisers
The good news for development executives is that even though Americans faced a stock market decline and a loss of income in 2001, they continued to make charitable giving a priority. Although the total amount of charitable gifts slightly declined, Americans continued to give at a surprisingly high level. In looking to the future, it is reassuring to note that in spite of the events of 9/11 and other challenges they faced in 2001, American taxpayers continued to give generously to the nation’s nonprofit community and will likely do so again in years ahead.
To help maximize giving for 2004, nonprofits should make an effort to focus on retention and upgrading of current donors, while selectively seeking new supporters. One way to appeal to established and prospective donors alike is to structure the “ask” in a way that is most appealing and convenient to the donor.
As noted above, the stock market recovery means that non-cash gifts may hold renewed attraction for major donors and potential planned givers. (See the March 2004 Give & Take article on securities.) Major donors will often prefer gifts funded with “paper gains” to cash gifts in times of market uncertainty and low interest rates.
Those who are cash poor and property rich may find charitable trusts, gift annuities, or other arrangements attractive. Fixed-payment gift plans may prove to be more appealing at the present than in the past due to reductions in interest rates and continuing stock market uncertainty. Keep in mind also that some 37 million taxpayers reported incomes of $50,000 or more and a large percentage of those itemize charitable gifts and other deductible expenses. It is thus important that donors be reminded that in times of slower income growth, the tax savings they enjoy as a result of gifts of cash and other property may be especially welcome.