Could charitable giving become a casualty of tax reform?
Gloom and doom predictions that the tax reform measures of 2017 would severely limit charitable giving do not seem to have materialized so far, but a new study says the tax overhaul could reduce charitable giving by up to $19.1 billion a year through 2025. The study, by the Lilly Family School of Philanthropy at Indiana University, shares that the tax overhaul could cut the number of households donating to charity by 2.6 million per year.
In 2018, Americans gave an estimated $427.71 billion to U.S. charities as individuals and through bequests, foundations, and corporations, according to “Giving USA 2019: The Annual Report on Philanthropy for the Year 2018.” But giving by individuals fell, while contributions from foundations and corporations rose. And while total charitable giving rose 0.7 percent measured in current dollars over the revised total of $424.74 billion contributed in 2017, adjusted for inflation, total giving actually declined 1.7 percent, according to the same report, which was released in June. The Giving Report is also based on research by the Lilly Family School.
The Tax Cuts and Job Act of 2017 made major changes with the potential to seriously impact charitable giving; they include:
- lowered individual tax rates, thus reducing the value of all tax deductions;
- increased the standard deduction to $12,000 for single and $24,000 for couples;
- capped the state and local tax deduction at $10,000; and,
- eliminated other itemized deductions.
These measures were expected to reduce the number of taxpayers itemizing and therefore the number of taxpayers taking a deduction for charitable contributions. According to Giving USA, “More than 45 million households itemized deductions in 2016. Numerous studies suggest that number may have dropped to approximately 16 to 20 million households in 2018, reducing an incentive for charitable giving.”
The new tax law also doubled the estate tax exemption to $11 million for singles and $22 million for couples. That could discourage bequests by some very wealthy households, significantly impacting large charitable donations.
While a change in giving seems to be coming, many experts both locally and nationally say it is really too early to gauge the impact of tax reform, despite some rather dire predictions.
“Charitable giving is multi-dimensional, however, and it is challenging to disentangle the degree to which each factor may have had an impact. With many donors experiencing new circumstances for their giving, it may be some time before the philanthropic sector can more fully understand how donor behavior changed in response to these forces and timing,” explains Amir Pasic, Ph.D., the Eugene Tempel dean of the Lilly Family School of Philanthropy, in the Giving USA report.
The news was good for charitable giving in the Columbia area this past year, and JoAnn Turnquist, president and CEO for the Central Carolina Community Foundation, believes uncertainty over tax reform was at least partially responsible. Central Carolina Community Foundation saw a 17 percent year-over-year increase in the July 2017 – June 2018 fiscal year giving, JoAnn says, adding, “This year we received more gifts than in any previous year. During the first six months of our fiscal year, July through December, donors contributed a record setting amount of money to their funds.”
Her anecdotal observation is that the increase occurred for two reasons: first, the stock market has been doing extremely well so people of wealth are more comfortable in making charitable gifts, and secondly, the uncertainty of the tax cut. “People are uncertain of the long-term effect of the cuts and many are making donations now in order to maximize one of the few remaining deductions. It’s a good time to give,” she says.
JoAnn will be interested to see whether the trend continues. “Fewer middle-range donors — the $1,000 contributor — are contributing as compared to lower dollar ones. The $20, $50, $100 contributors have stayed the course. The larger donors are contributing more, supported by the gains in the market. In order to receive a tax deduction, a family must exceed the $24,000 standard exemption. So, donors of wealth are increasing their donations.”
Bundling and Bunching
One way that high-net-worth or large contributors can continue to take advantage of itemizing and exceed the higher $24,000 standard deduction is a technique called bundling or bunching, which involves making several years of donations at one time and taking the higher donation in that year, then not donating and taking the standard deductions in other years.
This can be done by creating a donor-advised fund (DAF) or a designated fund. Each requires a $10,000 minimum donation to get started.
The DAF maximizes tax benefits and retains flexibility. A donor manages all of their giving through one account and supports multiple organizations and programs based on their charitable goals. With the designated fund, a donor supports a specific charitable organization or organizations that automatically receive a grant from the fund annually.
Ken Nopar, senior philanthropic advisor for the American Endowment Foundation, writing in Advisor Perspectives — a blog for Registered Investment Advisors, wealth managers, and financial advisors — says that DAFs were a major topic at the annual Heckerling Institute on Estate Planning’s national conference in January.
“Many advisors told me that one of the biggest benefits of the 2017 Tax Cuts and Jobs Act was that last year, clients and their tax, legal, and financial advisors discussed charitable giving more than ever before,” he wrote. “Clients wanted to understand the implications of the tax law changes. Consequently, because these conversations took place earlier than usual and throughout the year, more donor-advised fund accounts were opened and funded sooner. The size of the accounts that were created and the additional donations to already-established accounts increased substantially.”
“This law was the best thing to happen to DAFs,” Christopher Hoyt, professor of law at the University of Missouri Kansas City School of Law, told participants at the Heckerling conference.
JoAnn says Central Carolina Community Foundation markets DAFs. “We work with many professional advisors. Their clients come to them at the end of the year, especially those who own their own businesses. Their advisors are telling them to make a donation or a tax deferred deduction of $20,000 to $50,000 to lower their income to be in better shape at year’s end. That happens frequently. Bundling helps people get past the $24,000 by donating two years of anticipated gifts into one,” she says.
People often give significant amounts to their church. JoAnn says three or four donors worked with the foundation to establish Designated Funds for their church gifts. They donated money totaling two years of giving and requested that the foundation make grants to the church every three months just as they had done through their DAF. The designated fund option provides a simple auto pay option.
“For example, a donor can set up a fund and request that the Foundation send $1,000 a month to their church for the next two and a half years,’” JoAnn says. “It provides an opportunity to receive a tax break and support their faith home. Professional advisors and our staff can provide information about DAFs. They are cost effective and easy to set up. In fact, it takes less than an hour.”
Sara Fawcett, president and CEO of the United Way of the Midlands, agrees that it is just too early to tell what impact tax reform will have on giving. “I think we need at least three years of campaign to be able to say,” she says. “Since our campaign year is July to June, we really have only had half a year of campaign, because most companies run their campaign by March. Most campaigns had already run by the time that the tax law took effect; even at that, I would say we would need a couple of years of data to be able to say what kind of impact we are looking at. Nobody has enough data.”
But one of the trends that United Way of the Midlands has seen locally and nationally is that donors are giving more money. So, while the number of donors has decreased, though not dramatically, the number of dollars given has increased. “For example, here in the Midlands, if you looked four or five years ago, 30 percent of our campaign came from what we call leadership donors giving, $1,000 or more. Today it is 45 percent — similar to the national trend,” she says.
While the United Way does not offer DAFs, they are talking with the CCCF about how they can partner together when one of their donors has a particular interest. “If someone wants to give a major gift and has an interest in access to health care or early childhood education or literacy or affordable housing, we have opportunities for them to make that investment, and that is something that United Way has not historically done a lot of.”
Tax reform may or may not have a significant impact on giving. People will continue to give, JoAnn and Sara agree. Tax deductions are not why people give, JoAnn says.
Sara adds, “I think, overall, people give because they want to. I think there is going to be a slice of donors for which itemizing or not itemizing is going to make a difference, but for the majority of people, and for the high-wealth giver, I think it is a non-issue. Their primary motive is what are they giving to, how the dollars are being used, what the impact is.”