How the New Tax Law Has Affected Nonprofits

Nonprofit | October 10, 2019 | Holtzman Partners

Did the Tax Cuts and Jobs Act have a significant impact on charitable giving in the U.S.? When the new law was issued, there were dire predictions that it would affect nonprofits in an extremely negative way, especially smaller, community-based organizations. And in 2018, individuals did give less to charity than in the prior year.

But what was responsible? Was the fourth-quarter decline in the stock market the primary contributor? Or was it the new tax law?

Four Changes

The new tax law included four changes with the potential to affect charitable giving:

  1. Standard deduction increase: Doubling the standard deduction for individuals and families significantly reduced the number of households itemizing deductions, down from 33 percent to 5 percent, according to the Congressional Joint Committee on Taxation.
  2. AGI limit: The new law increased the limit on deductions for charitable contributions from 50 percent to 60 percent of adjusted gross income (AGI).
  3. Estate and gift tax exemption: Doubling the estate and gift tax exemption for individuals and couples lowered the tax burden on heirs. This had the potential to reduce the incentive for wealthy contributors to consider bequests as part of their estate planning.
  4. Corporate tax rate: A reduction in the corporate tax rate from 35 percent to 21 percent not only spurred corporate profits and improved the economy, but it also reduced the tax benefits to be gained by charitable giving.

The Numbers

How did these changes actually affect the numbers in 2018? According to “Giving USA 2019: The Annual Report on Philanthropy for the Year 2018,” total charitable giving rose 0.7 percent over 2017.

Here’s a by-the-numbers summary:

  • Individual giving (68 percent of total) declined 1.1 percent.
  • Foundation giving (18 percent of total) increased 7.3 percent.
  • Bequests (9 percent of total) remained flat.
  • Corporate giving (5 percent of total) increased 5.4 percent.

What Can You Do?

The good news is that donations increased in two major funding sources—corporations and foundations. Part of your strategy should be to follow the money.

Engage with corporate donors to ask how the new tax law is affecting their philanthropy strategy. With this insight, create a path to help them achieve their goals. Revisit corporate donors who declined in the past and update their awareness of your mission.

The same strategy can be applied to foundations. Perhaps they are now in a position to increase funding levels.

For individual donors, think high and low. Lower tax rates and a strong market mean high net-worth individuals are likely to have more disposable income and may be ready to contribute a larger first-time gift or increase from prior giving levels. The increased standard deduction has less of an effect on this level of donor.

Lower-level donors give because of your mission, not the tax benefit. Consider ramping up your direct appeals—direct mail and annual outreach—to these donors and make the case for why you need their help now more than ever. This new tax environment could provide good support for your message.

The Forecast

Despite gloomy predictions, 2018 turned out to be a good year for many nonprofits. For the time being, while unfavorable tax rules may depress individual giving, the economy has people feeling positive and generous.

Knowing your donors and how they react to economic changes is a good long-term strategy. Armed with this insight, you can adjust your message and your outreach to make the most of the current economic and tax climates.

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