Navigating the Unknown Impact of New Tax Laws
March 29, 2018 - by Tiffany Neill, CFRE, Partner
When the Tax Cuts and Jobs Act of 2017 was signed into law last December, fundraisers like us had one main question: Will the changes in the tax law impact donor behavior?
Only time will tell the answer. But, by understanding the major provisions of the law, we can get a sense of what might happen and — more importantly — what we can do about it.
There are two aspects of the new tax law that could, perhaps, impact fundraising. The first is the increase in the standard deduction (the law essentially doubled it).
What’s the concern?
Fundraisers fear that fewer people will itemize their deductions, effectively eliminating the benefit they are getting from the tax-deductibility of charitable contributions.
The fact is, even before this new tax act, most direct response donors did not itemize. In 2015, fully 69% of filers used the standard deduction and did not itemize.
The question is, of the 31% who did itemize, how many were including direct response gifts of $25, $50, $100, or $250 or even $500 (the gifts that feed many direct response programs)? And, how many of those will now claim the standard deduction? The jury is still out, but for now we are remaining cautiously optimistic.
We believe that for organizations to which contributions are tax-deductible, it is important to continue to include that language in your donor communications. Some donors will continue to itemize, and for all donors it’s important to inform them that their contributions are still tax-deductible.
The other group whose giving behavior probably won’t be impacted by the new laws are very wealthy people who will have deductions far over the increased standard deduction. These individuals will still itemize, and larger charitable gifts can be part of wise tax-planning strategies.
The donors (and donations) we are watching most closely are those in the mid-range ($1,000 to $10,000). We suspect some of these individuals may no longer itemize because of the change in the deduction. Now, we enter into a guessing game of “How much did tax planning factor in the minds of these donors when making gifts?”
What can we do about it?
Simply put, we can do what we do best:
Continue to speak to donors as people, not tax-return filers.
Connect them with the missions they care about and show how they are making a difference.
Make the case that through your organization, they can bring about the changes they want to sow.
At the same time, analyze and don’t take these donors for granted (always good advice).
Track donors and their contributions and watch for downgrades.
Reach out and steward!
The second aspect we’re watching (carefully) is the impact of the changes in the estate tax.
Previously, the portion of an estate above $5.6 million per individual or $11.2 million per married couple was taxed at 40%. The new tax law doubles these exemptions, with the untaxable limit increasing to $11.2 million lifetime exemption for individuals and $22.4 million for married couples.
This change may impact how very wealthy donors utilize charitable giving as part of their estate planning. Because the threshold for taxing estates has increased significantly, folks who might have been planning to make bequests to charities to lower the estate tax for their heirs may no longer do so because the threshold for taxation is so much higher. Instead, they can give all that money to their heirs.
Now, more than ever, remember that your donors may be using Donor Advised Funds (DAF) as conduits for their charitable giving. Many donors may have significantly increased contributions to their DAFs in 2017 as they were trying to assess the impact of the new tax law on their individual situation. In 2018 and beyond, these donors will be directing their giving through a DAF, not by writing a personal check or paying with their credit card, as they have in the past.
Make sure your organization is equipped to steward these donors.
Ensure that DAF gifts are credited to your donors in your database and that you’re asking for the appropriate gift going forward.
Remind donors that they can give through their DAF.
And add the DAF widget (DAF Direct) to the donation page on your website to make it easy for donors to direct their gifts to you.
What is important for us to remember — as fundraisers — is that people donate to nonprofit organizations for many reasons — not just the tax benefit. Now is the time to rely on best practices of fundraising and stewardship to ensure that your donors feel so good about your organization that they keep on giving!