Right before Christmas, President Trump signed the Tax Cuts and Jobs Act, into law. This new tax bill permanently lowers corporate tax rates and temporarily reduces individual tax rates. (It also allows drilling in the Arctic National Wildlife Refuge, but I digress.)
Will the new tax reform impact fundraising? Yes, without a doubt. While some pundits are less cynical about the tax reform’s effect, your organization should absolutely be reevaluating its upcoming fundraising goals—especially in its mid-level, major donor and planned giving programs.
Let’s review how the new bill could impact fundraising and what you can do about it.
1. Uncertainty. Any major tax overhaul (and this one is being compared to the scale of Reagan’s 1986 tax reform) breeds uncertainty. Because of the increased standard deduction for tax filers and the reduction in deductible write-offs (mainly related to real estate and state and local taxes, many taxpayers will no longer itemize their deductions when they file their returns. This uncertainty will lead many potential donors to reduce or eliminate their giving because they are not sure of the tax benefit they will receive, if any at all.
And uncertainty can depress giving. Whether a donor gives altruistically or for the tax-deduction, most individuals will be nervous about how this law will impact them personally.
Organizations will have to brace for the unknown because many people won’t know how this law will affect them until they actually file their 2018 taxes in early 2019. That’s a long time to deal with doubt.
What you can do now: Show donors the true value of belonging to a community of like-minded people. Nearly two years ago, futurist J. Walker Smith predicted the country’s desire for “longing for belonging”.
Walker Smith talked about VUCA—a cold war military term that describes a world that is Volatile, Uncertain, Complex and Ambiguous. Walker Smith said, “VUCA is the turbulent, crazy world consumers find outside their front door every day.” Sound familiar?
Add onto this the ever-widening partisanship and inherent mistrust in our society and Americans—our donors—are angry, fearful, disillusioned and confused. Non-profits are perfectly positioned to give donors a place to belong—to bring together people who identify with your values, your work, your mission. Create a community for your donors and the world will be less uncertain.
2. Increased standard deduction. The increased standard deduction will nearly double for both married couples (up to $24,000) and single filers (up to $12,000). The Tax Policy Center estimates that nearly 30 million filers will no longer have to itemize. Why is this a big deal? Because taxpayers won’t have as much of an incentive to itemize their deductions to reduce their taxable income.
Although surveys indicate that smaller-dollar donors don’t give because of a tax deduction, research also shows that 87% of donors do itemize on their tax returns. So, tax-deductibility can be a motivating factor, and tax-deductibility is certainly part of our country’s giving DNA.
The National Council of Nonprofits and the Indiana School of Philanthropy is estimating that the changes in the new tax bill could depress philanthropic giving between $13 billion and $20 billion per year.
What you can do now: Retool your fundraising program to ensure it’s giving a tangible value to each philanthropic gift. While that advice is easier for institutions that can give items like free admission, it’s also possible to illustrate value of donations that don’t have tangible benefits. Do you keep donors apprised of global news? Do you offer them guides to enjoying our national parks?
Prove to donors that your organization is doing more with each dollar. It is estimated that the after-tax price of giving will increase by 8%. How can you illustrate to donors that you are increasing the benefit amount of their donation to cover the (real or not) increased tax-burden?
Ask for larger donations. Giving larger donations may help taxpayers reach the threshold of needing to itemize—which will lead to a larger tax-deduction. Note that some financial planners are suggesting that taxpayers double their giving every other year, to ensure that they don’t lose the tax-deduction from their charitable giving.
3. Lowered Estate Taxes. While not as dire as in earlier versions of the bill, the estate tax threshold has increased significantly—from $5.6 million to $11.2 million for individuals and, if properly managed, $22.4 million for couples.
The law is expected to sunset in 2025, so major donors are likely to make familial gifts now, rather than wait. Far fewer estates will be subject to the levy — the Joint Committee on Taxation estimates the number of taxable estates would drop from 5,000 under current law to 1,800 under the new law in 2018. Of course, planned giving programs have soared in the last few years—and even as the number of taxable estates fell (in 2000, when the exemption was $675,000, 52,000 estates paid the tax).
What you can do now: Don’t stop marketing your planned giving vehicles! Just make sure you’re focused on the philanthropic benefits and the legacy donors are leaving. In addition, savvy donors may be looking more at vehicles like charitable lead trusts, so make sure you understand all your planned giving opportunities. In addition, donors may be using money to fund life insurance policies, so be sure to talk with donors about the opportunity to name your organization as a beneficiary.
Also, if you can, focus more of your marketing efforts to donors without children, long-time donors who have proven to be mission-focused and higher-rated major donors, who may not qualify for the estate tax exemption.
4. Increased use of alternative giving vehicles. While this didn’t change, making gifts from retirement accounts will certainly become more of a focus during year-end planning. For donors who make a qualified charitable donation (QCD), the money is subtracted from their taxable income and often lower a taxpayer’s income enough to have them avoid paying Medicare premiums.
Also, Donor Advised Funds (DAF) will become a more popular giving vehicle. DAFs are like personal charitable savings accounts. Taxpayers can add cash or securities to a DAF, take the deduction now, and distribute the money at a later time. DAFs are also a good way to unload appreciated securities without paying capital gains taxes. When taxpayers put their appreciated securities into a DAF, they get to deduct the full appreciated value of those securities from their taxable income that year.
What you can do now: Increase your organization’s marketing of these alternative vehicles. Prominently highlight DAFs on your website (there’s an easy widget that most nonprofits can add to their website). And, make sure you have age appended to your database, so you can target donors who qualify for making QCDs from their retirement accounts.
5. Increased 2017 Year-End Giving. With all the publicity about tax-reform, financial advisors, nonprofits and even the media are encouraging donors to give in 2017 to benefit from the tax-deduction.
What does this mean for your organization? This year-end is probably not a barometer for next year-end. While giving will certainly increase next December, the “tax-deductibility” technique won’t be as effective.
What you can do now: Right-size expectations. We can’t say for certain how much giving could drop next December, but preparing leadership that there could be an impact is a conversation to start having early in the year.
Don’t forget, too, that year-end creates a natural deadline and urgency all on its own. While experts are split as to whether or not a fiscal-year end push is effective for motivating fundraising, we have seen great success using deadlines to motivate giving. December 31, 2018 will be here before you know it—and your organization should have a marketing plan to tackle it.
No matter what you do, remember to make your organization a donor priority. This tax reform and its consequences could have a significant impact on your mission and who you serve. There has never been a more important time for increased funding.
(Note: This article is not intended for legal or accounting advice. Please check with the appropriate people in your organization to ensure you are in full compliance with the new law.)