A tax reform question
Will higher standard deductions mean fewer charitable gifts?
Charitable giving by individuals, corporations, estates and foundations in the U.S. has reached all-time highs in recent years, but many nonprofits in Virginia are nervously watching for a possible decline in giving because of recently passed tax reforms.
The federal tax overhaul that President Trump signed into law in February will almost double the standard deduction for individuals and couples to $12,000 and $24,000, respectively. That means that far fewer people will itemize their deductions, including charitable contributions, when they file their 2018 tax returns next year.
“The tax law in all likelihood is going to put a damper on charitable giving by individuals — how much and to what extent, we don’t know, but we are going to find out,” says Eileen Ellsworth, president of the Oakton-based Community Foundation for Northern Virginia.
And at a time when the federal government is cutting back on grants to nonprofits, “It’s almost like a double punch,” Ellsworth says. “If the government dollars are receding, and the tax law is now discouraging charitable giving by individuals, you can understand the vise that this puts the nonprofit sector in. … To say it was discouraging that Congress passed a law that could put such a damper on individual charitable giving … is just the understatement of the year. I mean, it was shocking, frankly, shocking.”
Not everyone believes, however, that the tax overhaul will result in less charitable giving. Americans donated a record-high $390 billion to charities in 2016, according to Giving USA, a publication from Chicago-based Giving USA Foundation, which tracks trends in American philanthropy. And the 2017 figures, expected to be released in June, may exceed that.
In fact, “as people were preparing for tax reform, there were a lot of people that were making big year-end gifts … because they weren’t sure what was going to happen. So, the end of the year was very good” for charitable giving, says Keith Curtis, the immediate past chair of the Giving USA Foundation. He is the founder and president of The Curtis Group, a Virginia Beach-based fundraising consulting firm.
In addition to the doubling of the standard deduction, Congress also doubled the estate-tax exemption to $10 million. Some charitable-giving experts expect the tax code changes could reduce overall U.S. charitable giving by as much as 5 percent, Curtis says.
“So, you could see a drop,” he says. “On the other hand, what we know is that the economy really drives giving a lot. And, so, if people are feeling like they have some more money in their pockets, if the economy continues to be strong, they could really be more generous with their charitable giving.”
Hard to predict impact
Sherrie Armstrong, president and CEO of The Community Foundation Serving Richmond and Central Virginia, says it has benefited from “bequests where people had to give more money to charity through their estates after they passed away due to taxes on their family members.” The dramatic increase in the estate tax exemption, she says, could result in fewer bequests to the foundation. “But again, we’re not sure. We haven’t seen anything on that yet.”
Geoffrey G. Hemphill, a tax attorney with Norfolk-based Vandeventer Black LLP, says it’s far from clear what impact, if any, the tax overhaul will have. Not getting a tax benefit won’t stop his own charitable giving, Hemphill says, “and I suspect a lot of people are like that. I’m still going to give to my church, and I don’t care what the loss of a deduction is. … I always thought charity was a matter of the heart and not a matter of your personal wallet.”
Michele A.W. McKinnon, a partner with McGuireWoods in Richmond, chairs the law firm’s nonprofit and tax-exempt organizations industry team. She also thinks it’s premature to predict what effects the tax reforms will have.
For starters, a lot of people who give small donations to charities probably weren’t claiming those donations for deductions, she says. And millennials, she adds, don’t make charitable decisions based on taxes. “Younger generations are going to fund stuff because that’s what they believe in,” McKinnon says. “Look at crowdfunding and all that. That’s normally not deductible, and people are more than willing to contribute to what they believe in.”
As for wealthier donors making large contributions, Armstrong points out that they still will itemize because their deductions will total more than $24,000: “I’m not sure it’s going to affect their giving,” she says. “I’m not anticipating the change in giving there.”
McKinnon says that, in her experience, very few high net-worth donors “focus on the tax benefits. … High net-worth individuals are more interested in how to achieve a particular goal, and what they struggle with is finding an organization to help them, not taxes. That’s not what’s driving them. And I’ve seen that with my clients who give away lots of money — many of them can’t use the deduction because they’re maxed out.”
Even though it’s far from certain what impact the new tax law will have on giving, nonprofits and foundations are watching the situation carefully and trying to be proactive.
The Community Foundation for Northern Virginia, for example, is launching a data-collection initiative called Give Northern Virginia to track charitable giving.
“We’ve invited every single nonprofit we all know in the region to join,” Ellsworth says, adding that the group will collect information on 2018 charitable giving each quarter and track the changes from the previous year.
Meanwhile, the United Way of Southwest Virginia has been reaching out to its biggest donors.
“I actually talked with one of our major supporters today, who is a personal individual donor but has also helped our organization secure some foundation gifts,” says Mary Anne Holbrook, the nonprofit’s director of community relations. The donor, who already had spoken with some other United Way backers, told her the tax changes won’t affect their giving decisions.
“Tax deductions are certainly on that spectrum of things that can influence a decision, particularly for those of a certain [financial] level,” Holbrook says. “But it’s always low on that list of motivating factors.”
After the 2008 recession, many foundations refocused their grants and community efforts to maximize their impact. As a result, they may be in a better position to weather any potential dips in giving caused by tax reform.
“Foundations are more careful … deploying the available philanthropic dollars that they have,” Ellsworth says. “They’re looking for matching partnerships” and focusing grants on initiatives that will have the biggest overall positive impact on their communities.
Armstrong says, “We’re always encouraging more collaboration [among community groups] and more focus on goals and aligning and working more closely together.”
High net-worth donors
Some nonprofit sectors also face far less danger of shrinking contributions. This group includes the beneficiaries of large philanthropic gifts from wealthy donors, such as college capital campaigns, Curtis points out.
“Keep in mind that 50 percent of all individual giving in this country comes from high net-worth individuals,” he says. “High net-worth individuals give a lot to arts and education, so arts and education probably won’t see quite the impact.”
Smaller nonprofits, however, rely on small donations. If middle-class donors cut back on donations because of the new standard deductions, those nonprofits might face the most peril, Curtis and others say.
Other factors that could change overall giving amounts include new trends in philanthropy such as “impact investing.” In that arrangement, high net-worth individuals make for-profit investments in ventures that benefit the community, such as a new grocery store in an urban “food desert,” McKinnon says.
Many wealthy philanthropists have begun to supplant their charitable giving with social impact investing, she says. If impact investing is encouraged by tax reform, it could hurt charities depending on traditional fundraising, McKinnon adds.
And because the standard deduction has raised the threshold for itemizing, some upper middle-class and high net-worth individuals may be more likely to take advantage of tax strategies such as bundling deductions or creating donor-advised funds, says Curtis.
Both strategies allow individuals to itemize on their taxes for a single year. Bundling involves giving more to a charity in a given year in order to get the donor’s giving above the standard deduction. The donor who bundles then may give far less or nothing to the same charity in the following tax year.
Donor-advised funds are a tax strategy in which a donor commits to give a certain amount to a charity over a defined period of years. The donor doesn’t have to give all of the money up front, but they can use it as a one-time itemized deduction on their taxes for a single tax year.
Curtis strongly recommends that people discuss such moves with a financial planner or tax adviser to see whether it would make sense for them.
On the whole, most of those watching the philanthropy landscape say we probably won’t know until 2019 or 2020 what effects, if any, the new tax changes will have on charitable giving.
“It’s really going to be interesting to see what happens in 2018 and going forward,” Curtis says. “Our hunch is that people will still want to support those nonprofits that they’ve given to because they believe in them, and they know they make their communities a better place. But we just don’t know that for sure.”