Three months into the new year, the highly anticipated GOP Tax Bill (H.R.1) is in full effect. Below, we look at how the new tax regime may impact individual and corporate giving, and steps nonprofits can take in response to new opportunities.
We have studied the key provisions that took effect on January 1, 2018. A few of those provisions are as follows:
- The standard deduction doubled from $6,350 to $12,000 for individuals, and $12,700 to $24,000 for married couples.
- The charitable contribution deduction limit rose from 50% to 60% of an individual's adjustedgross income (AGI).
- The estate and gift tax exemption doubled for single filers from $5.5 million to $11 million and up to $22.4 million for married couples.
- The corporate tax rate has been reduced from 35 percent to 21 percent on all profits, which is 4 percent lower than the global average corporate tax rate. In theory, this should make the U.S. more globally competitive and help keep more corporate profits in the U.S.
What Does This Mean For Nonprofit Fundraising?
We first want to emphasize that we have looked at the likely impact of the tax changes from our perspective as fundraising specialists. Nonprofits and donors should consult with their tax advisor before making any tax-related decisions.
According to the Congressional Joint Committee of Taxation, the new tax bill will reduce the number of Americans who itemize their taxes (currently about 30 million people) from 33 percent of taxpayers to just 5 percent. Because of this, the resulting reduction in annual giving has been estimated to be anywhere between $13 billion and $20 billion. This drop would wipe out the philanthropic growth since 2015. Planned giving may also be impacted. Although no formal models have been produced to predict the actual impact of the new estate tax exemption on charitable giving, it is estimated that lowering the tax burden on heirs will reduce the incentive of wealthy Americans considering a gift to charity as part of their estate by up to $4 billion per year.
Swings And (Corporate) Roundabouts
However, reductions in individual giving may be more than offset by the gains to corporations, many of which have been left with more cash thanks to the corporate tax cut. Several large companies have already announced significant increases in their contributions, so we may see an increase in the amount that corporations give. However, it's important to note that corporations may be less incentivized to lower their tax bills with charitable donations.
Will Local Charities Bear The Brunt?
These changes to the law may impact some charities more than others, in particular local and community-based organizations. It's shown that these types of organizations benefit from the philanthropy of middle-income Americans to a larger extent. It's been speculated that this giving cohort may be less philanthropic this year, and in future years, due to the increased standard deduction (therefore less incentive to itemize their deductions).
Five Places To Focus In 2018
In all of the uncertainty around tax changes, we've included a few recommendations below that will help you navigate this unsure time.
1. Aim High and Low
Under the new tax bill, nonprofits risk losing donors who gave above the 2017 standard deduction but now fall below the increased deduction. With less of an incentive to itemize, will donors change their behavior?
Regardless of how these donors behave, there are two groups you should consider ramping up your efforts around low-level donors through direct mail and annual appeals (more below) and major gift prospects and donors capable of making charitable gifts of $12,000 or more each year. The new tax rates and resulting strong market mean high net worth individuals are likely feeling flush, and may be ready to give.
2. Ramp Up Direct Mail and other Annual Appeals
It's well known that direct mail and low-level annual appeal donors give because of the mission, not the tax benefit. Take the time to thank them for their contributions, and make the case why you need their support now more than ever. They want to support you: give them the reason to invest more deeply.
3. Consider Your Corporate Strategy
Since the jury is still out on how corporate donations will be impacted, it's important that nonprofits remain thoughtful and flexible. Ask your current corporate donors how the new tax law is impacting their future giving decisions—and create strategy around their answers. Is there an opportunity to ask for an increased annual gift, an event sponsorship, or to pursue that donor who declined in the past?
4. Make Your Case to Foundations
Reevaluate your relationships with your foundation donors—they may now be in a position to give more. Reconnect with your contacts and make your case as to why your organization needs their long-term support.
5. Invest in Relationships and Market Your Mission
Your mission is important, and that does not change with the changing tax laws. Make sure the right people feel connected to your mission by investing in fundraisers that are relationship builders. Constant outreach is important and personalization matters. Make people feel valued, bring them in to see your work in action, and above all, thank them for their part in realizing your mission.
As the impacts of this new law start to surface, return to the basics of fundraising—look at your donor groups, find your opportunities, and make your case.
This piece is reproduced with permission from the March 2018 Orr Associates, Inc. (OAI), newsletter. Lisa Keitges is a director and Katie Nickels is an associate with OAI, a consulting firm that helps nonprofits fundraise more successfully through a business orientation to problem-solving, a metrics focus, and an outcomes-driven perspective.