During a recent webinar conducted by SobelCo featuring Linda Czipo, President and CEO of the Center for Non-Profits in New Jersey, Linda was asked to lead a discussion on the specific changes under the Tax Cuts and Jobs Act (TCJA) that are having such a great impact on charitable giving.
One of the greatest areas of concern is that the popular charitable deduction, claimed by about 30% of tax payers in previous years, is estimated to be used by only about 10% of tax payers going forward. The estimates are that this shift could cause a $13 billion annual drop in charitable giving across the country. In September 2018, Martin Shankman, a Forbes contributor, noted, “One estimate is that 30 million taxpayers itemized deductions – and that figure will now plummet to a mere five million.”
Why is TCJA responsible for this critical projected drop in giving?
In 2017, the standard deduction amount was $6,350 for single taxpayers and $12,700 for married taxpayers filing jointly. The new Tax Act nearly doubled these amounts. Under TCJA, the basic standard deduction has risen to $24,000 for joint filers, $12,000 for single filers, $18,000 for heads of household and $12,000 for married filing separately, making it much less likely for tax payers to itemize their deductions going forward.
Here in our state, New Jersey households claimed $6.69 billion in federal charitable tax deductions in 2016. Interestingly, almost one-half (46%) of those deductions were taken by taxpayers with annual household incomes of $100,000 or less and four-fifths (81%) of the deductions came from households with annual incomes of under $200,000. This demographic clearly highlights that it is primarily the middle class families who supported the state’s charities and who will be most likely to opt now for the higher standardized deduction.
Linda is not alone in her concerns.
After the Act passed, many well regarded news sources and commentators offered similar observations. As early as January 11, 2018, Forbes published an article authored by Howard Gleckman which opened with this prediction: “The Tax Cuts and Jobs Act will shrink the number of households claiming an itemized deduction for their gifts to non-profits from about 37 million to about 16 million in 2018, according to new Tax Policy Center estimates. At the same time, the new law will reduce the federal income tax subsidy for charitable giving by one-third, from about $63 billion to roughly $42 billion. Overall, the TCJA will reduce the marginal tax benefit of giving to charity by more than one-quarter in 2018, raising the after-tax cost of donating by about 7%.”
While final details will not be known until 2018 tax returns are filed, Linda offered a sobering reflection from the Fundraising Effectiveness Project (FEP), a partnership of the Association of Fundraising Professionals (AFP) and the Center on Nonprofits and Philanthropy at the Urban Institute, that indicates a 2% decrease in charitable giving in the first two quarters of 2018 and a 6% decrease in donor retention during the same time period.
But what can nonprofit organizations do to mitigate the situation?
First of all, it is important for everyone in the nonprofit community to be aware of the Act and its potential influence on giving, especially for those organizations that have traditionally relied on year-end campaigns.
“Organizations need to know who their donors are,” Linda advised. “It’s unwise to emphasize the charitable deduction to a donor who isn’t in a position to claim it. But the charitable deduction is still available for those taxpayers who itemize, and some donors may not be aware of other giving mechanisms such as bundling donations, donations of stock donating stock, the IRA charitable rollover, or others that might be available. Charities need to look at their donor base and have the conversations that are tailored appropriately to donors.”
While most contributors are motivated to support an organization because of their passion for the entity’s mission, other tactics will need to be leveraged for those who were influenced, or at least encouraged, by the benefits of an itemized tax deduction.
If it is expected that some income could be lost, it is important for nonprofit Executive Directors and Development Directors, along with board leaders and volunteers, to have frank conversations with donors explaining the value of their investment and the economic impact of the organization on the community.
If revenue decreases, nonprofits will need to consider other actions as well. Many may consider diversifying their revenue streams, conducting a cost/benefit analyses of their programs and services, comparing costs on major or minor purchases to minimize expenses, and engaging and connecting with donors by changing the conversation to build awareness.
Most importantly, nonprofits and their supporters need to continue to speak out, and work collectively to advocate for positive change.
