Uncertainty is a natural response to change. As such, I am not alarmed that a majority of nonprofit and foundation leaders alike are concerned that changes to the federal tax code precipitated by the Tax Cuts and Jobs Act will depress charitable giving and hinder services that benefit our communities. A new study by the Center for Effective Philanthropy (CEP) found that 53 percent of leaders in both sectors share this concern, while many others simply aren’t sure of the ramifications.
While it’s appropriate to acknowledge the range of possibilities that may result from doubling the standard deduction and other provisions in the new law, our focus in philanthropy should be on understanding the opportunities we have to grow giving. For community foundations especially, this involves serving as a hub of knowledge and educating others about the numerous benefits of giving and the positive impact philanthropy has in the community.
Experience tells us that most major donors are not principally motivated by tax deductions. While wisely seeking the greatest return on investment — including a favorable tax position — their reasons for giving are much more deeply connected to organizational mission and the personal joy of generosity. Both funders and nonprofits should continue to emphasize how our work is changing lives and provide corresponding evidence of how quality of life in communities is improving as a result.
Our sector should also further inform donors how to effectively navigate the current philanthropic environment. The advantages of donor-advised funds (DAFs) come to mind.
If donors have the capacity, they may benefit from bunching their charitable gifts into a single year using a DAF. This would allow them to itemize in the year they establish their DAF and then take the standard deduction in subsequent years, during which they can also make grants from their fund.
The IRA charitable rollover option is not new, but now that it is permanent, it stands as an increasingly attractive choice for those who meet its criteria. At the Greater Milwaukee Foundation, the community foundation I lead, we are seeing more donors age 70½ and older who do not need those retirement account dollars for living expenses roll their IRAs directly into a qualified charitable fund and avoid having to recognize the income. We should encourage local nonprofit leaders to market this option to their qualifying donors, especially since it benefits both parties.
One aspect of the new law may actually result in larger charitable gifts from high-income taxpayers: the allowable deduction for a cash gift increased from 50 percent of adjusted gross income to 60 percent. Like every aspect of the changing rules, however, the effects remain to be seen.
We can anticipate that the tax changes will affect different donors in different ways, so what it means for nonprofits will vary. We may see smaller nonprofits that rely more on smaller, individual donations face declining revenue as more people take the standard deduction. But then again, donors with modest incomes are likely motivated more by cause than by tax incentive.
We may also see the timing of gifts change. If December 31 is no longer perceived as a charitable gift deadline for tax purposes, some donors may choose to delay or spread their giving throughout the year. This suggests nonprofits may want to maintain a steady drumbeat in making their case to current and prospective donors while planning their budgets according to calendars less tilted toward year-end giving.
Even with these preparations, it will likely be years before we understand how this new legislation has affected charitable giving across the U.S. and in our specific communities. Meanwhile, economic forces have an outsized influence on the philanthropic landscape. A strong economy usually begets larger gifts, while giving often declines in the shadow of a downturn. Either scenario shapes giving to a greater extent than tax law.
What remains consistent is the need for funders and nonprofits to broaden community knowledge and demonstrate effectiveness so charitable giving — and, consequently, positive impact — will grow, even as circumstances change.
Ellen M. Gilligan is president and CEO of the Greater Milwaukee Foundation.
Bracing for a Downturn: Nonprofits, Charitable Deduction Worries, and How Foundations Can Help is available for free download here.