Posted August 8th, 2018

Philanthropy and Generosity

There are many reasons people make charitable gifts. Tax considerations are not among the most cited.

By most accounts, 2017 was a record year for charitable giving (see “Trends in Giving: New Reports on U.S. Philanthropy” in the July 2018 Give & Take). However, a number of well-researched studies are predicting that overall charitable giving will fall between $11 and $20 billion this year.

The primary reason for the projected drop in giving is the anticipated influence of the Tax Cuts and Jobs Act of 2017 that was signed into law last December. Indeed, history tells us that tax cut legislation tends to negatively impact charitable giving the following year before giving rebounds and resumes longer term growth trends.

In retrospect, those prior contractions were probably influenced in large part by timing issues. Typically, many taxpayers choose to accelerate gifts into the current tax year to maximize their tax savings when tax rates are scheduled to fall the following year. Last year was no exception. November and December of 2017 saw a surge in charitable giving as the possibility of the passage of the largest tax cut bill in thirty years appeared likely. Of note was the massive inflow of funds to donor advised funds (DAFs) in the fourth quarter of 2017.

Early versions of the 2017 legislation would have much more severely limited the tax benefits of charitable gifts, and this no doubt influenced giving behavior for some donors even though the final legislation was not nearly as negative for charitable giving.

Currently, many have concerns that the new tax law legislation will put a damper on philanthropic activity by reducing the number of itemizers by more than half to approximately 20 million households. In addition, the new lower tax rates will increase the after-tax cost of giving for most taxpayers. The virtual elimination of the estate tax, except for a portion of the top 1% of the population, is another concern.

The net effect of the current tax law will be to increase the importance of charitable planning for income tax purposes for many donors considering larger contributions now or as part of their long-range plans, whether they itemize deductions or not.

For example, the tax benefits of making gifts of appreciated property or directing funds for charitable use from individual retirement account (IRA) assets can be substantial whether or not a donor itemizes the gift. Others may boost or bunch deductions in order to reclaim their status as itemizers. Or they may accelerate a bequest by funding a gift annuity or charitable remainder trust in order to generate substantial deductions that will allow them to minimize their income tax for up to six years from a single gift.

Capacity and propensity

Donors must have both excess discretionary income or assets and be interested in funding a particular mission in order for a gift to occur. Despite what many believe, tax considerations are rarely the primary reason a donor chooses to make a charitable gift. According to numerous studies of philanthropic behavior, the number one and two reasons for making a gift are the charity’s mission and the donor’s desire to further that work. That is why your mission should be where you begin a discussion, not the tax and other financial benefits for the donor.

While tax deductions and/or premiums included in solicitations may affect the amount or timing of gifts, it is important to continually remind your donors of the work you do and tell stories in your communications that illustrate your mission’s importance and effectiveness. A gift to any qualified charity will result in similar tax benefits for the donor. That is why it is vital for you to highlight your mission in your communications with your donors. It can then be a natural progression to inform them about ways they can stretch their charitable gifts for maximum benefit.

Balancing the message

Moving forward, and especially this year, it could be a big mistake to either underemphasize or overemphasize the role of tax policy in charitable giving. Most gifts are motivated primarily by factors other than tax and economic benefits. Nonetheless, giving the right property at the right time in the right way can increase the size of a gift and enhance the satisfaction of the giving experience for the donor or others.

Click here for information about communications to share with donors. ■

The publisher of Give & Take is not engaged in rendering legal or tax advisory service. For advice and assistance in specific cases, the services of your own counsel should be obtained. Articles in Give & Take may generally be reprinted for distribution to board members and staff of nonprofit institutions and other non-donor groups. Proper credit must be given. Call for details.

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