are tax law changes affecting charitable giving?
the anticipated effect of the tax cuts and jobs act
At the tail end of 2017, Congress signed the Tax Cuts and Jobs Act (TCJA) into law. One of the major changes this law made was increasing the standard deduction for both single filers and married couples. This made deducting charitable contributions on tax returns much more difficult for individual taxpayers.
For the not-so-tax-savvy, on your tax return you can either itemize your deductions or take the standard deduction, but not both. Itemized deductions include property taxes, some out-of-pocket medical expenses, mortgage interest, and, among a slew of other things, charitable donations. If the total sum of all these items is greater than your designated standard deduction, then it’s beneficial for you to itemize. However, by raising the standard deduction, this made taking the standard deduction better for many taxpayers who would have itemized prior to the passing of the TCJA.
When the law was passed, many theorized that charitable giving would tank and nonprofits would suffer, especially ones that heavily relied on donations as their main source of revenue. One study, conducted by the University of Indiana, estimated that charitable giving would decrease by up to $13.1 billion.
what actually happened?
Now that we’re well clear of tax season, we’ve been able to get some insight into effect the TCJA has had on charitable giving. There is some good news! According to John Gilchrist of Philanthropy Focus LLC, early data suggests overall charitable giving increased slightly in 2018. The bad news? There are fewer people donating across all donation sizes, meaning that nonprofits are drawing more money from a smaller pool of donors.
This may seem counter-intuitive. If fewer people are being incentivized to donate through tax deductions, and fewer people donated in 2018, how did overall donations increase? While I don’t have a definitive answer to that question, I do have some theories:
The ultra-high earners in the US are still heavily incentivized to make charitable contributions. One of the most significant sources of income for the ultra-wealthy is through gains made in capital markets (i.e.: through stocks and bonds). It’s possible that many high net-worth individuals simply had a lot of gains at the end of the year and were seeking a way to lower their tax burden. If this theory holds, then it makes sense that we’d end up with a smaller group of people donating a lot of money.
The TCJA also decreased costs for businesses. The combination of TCJA changes and solid economic conditions could mean that businesses had more money available to donate in 2018. This could also help explain why nonprofits saw increased overall donations from a smaller donor pool.
Many people do not donate for the purpose of receiving a tax deduction. Donors are drawn to an organization’s purpose, their storytelling ability and whether or not they feel their donations are making a difference. In fact, in another study conducted by the University of Indiana, high-net-worth individuals were asked to identify their reasons for making charitable donations. According to the survey, only 18% said they donate because they would receive a tax deduction. This shows it’s possible that the TCJA had little to no impact on donors’ decision to contribute and that the shrinking donor pool is the result of factors outside of tax law (i.e.: change in donor demographics, changes in disposable income, lack of engagement, etc.)
What does all of this mean for your organization? So far, it appears the Tax Cuts and Jobs Act will not play a significant role in donors’ willingness to give. This is great news, but the overall trend of a decreasing donor pool is troubling. We know that many donors make decisions based on emotion. Your efforts should focus on telling compelling stories and getting donors to engage with your organization in meaningful ways. Always be on the lookout for how to improve your giving infrastructure and increase the number of ways donors can give. Brainstorm creative ways to show donors how their contributions have made a difference and helped continue your mission.
is your story-telling game up to speed?
Need help figuring out how to actively engage and retain donors? Don’t hesitate to partner with an industry expert! Get in touch with us. Leverage our nonprofit expertise and find out how our custom solutions can help! We’d love to be a part of your mission.
Gilchrist, John. (2019, May 23). How the New Tax Law is Impacting Nonprofits.
Nickerson, Mark. (2018, May). First Look at the Tax Cuts and Jobs Act.
Legal Disclaimer: We at the Cause Collaborative are not tax experts. This article is meant for informational purposes only and does not constitute financial or tax advice. Please consult your tax professional for specific advice.