Tax Reform Guidance: Will Charitable Giving Decrease in 2018?

1/18/2018

We hear you: your greatest concern, as nonprofit leaders, is the potential shift in charitable giving, and I’m devoting the bulk of this column to that topic specifically.

The reform implications are multi-faceted: charitable giving, federal/state budgets, compliance, and taxation. There are changes in store. We are here to help you navigate them.

Before we dive into my optimistic views, I want to let you know that we are planning webinars, sharing resources, and creating a toolkit for you. All will cover aspects of the reform as information and resources become available to us. As soon as we have something to share, we will.

Now, onto the good news. I want to highlight a bright spot and lay out some strategies for you going forward. History tells me that as far as the charitable giving issue is concerned, we don’t need to worry. That doesn’t mean we don’t need to take action or think about things differently, but I’m not worried and you shouldn’t be either.

Looking at the Past

Way back in the 1980’s – around the time I bought my first cassette tape (Michael Jackson’s Thriller, in case you want to know) and parachute pants and fluorescent accessories were a thing – then-President Reagan was working on tax reform policies that ultimately became the Tax Reform Act of 1986.

Does any of this sound familiar to you?

“The reform simplified the tax code. It expanded the standard income deduction. In order to keep marginal income tax rates low, it made up the lost revenue by eliminating deductions, particularly on the corporate side.” (source: PBS News Hour, December 4, 2017) The quote is in reference to the Tax Reform Act of 1986.

We’re kidding ourselves if we think these tax reforms are identical in nature, they are not. The article linked above gives the most common-sense description of the differences, the biggest one being the 1986 reform was truly a bipartisan effort developed over a lengthy period of time and not fast tracked like the most current reform. There, I said it. Moving on.

I quoted that specific part of the article for this purpose: even way back in 1986 the standard deduction was expanded and several deductions were eliminated. It streamlined our tax code. And guess what? There were other changes to charitable giving deductions that could have had a negative effect on giving, but it didn’t.

Yet, at the time there were fears about reductions in giving. I encourage you to read this article, published in the May 30, 1985 issue of the NY Times. You will see some common themes emerge from 32 years ago, and as I mentioned, those fears did not come to fruition.

In fact, while there were shifts in where giving came from (one year it was major gifts that shrank, but smaller giving more than made up the difference) overall charitable giving increased. Increased. And consistently so.

The Numbers

How do I know all this? I was able to go to the IRS website and pull up the IRS reporting the years between 1985-1987. I then created a chart that you can see here. Also, I created a quick snapshot of the relevant parts of each of those 180+ page documents (you’re welcome!) that you can see here.

My analysis of what I saw is this:

There was clearly a spike in giving in 1985 prior to the implementation of the new tax code in 1986. Sound familiar? There was a big increase in gifts at the end of 2017 because people wanted to be sure they could access the deduction. In 1985, the increase from 1984 was nearly 14%. It will be fun to see what it was between 2016 and 2017!
Overall total charitable giving continued to increase in 1986 and 1987! In fact, I would also like to point out that between 1987 and 1989 the number of itemizers fell by nearly by almost 9 million filers over the three year period. Yet, charitable giving still increased.

All the “sky is falling” opinion pieces you are reading are not looking back at history to see that yes, people still give. The average gift in 1989 was $1676.26 yet the average gift a few years earlier in 1987 was $1090.42.

My final point is this: the IRS can only measure what is captured on itemized returns (after the elimination of the non-itemizer deduction beginning in 1986) and I’m willing to be that these new “non-itemizers” still continued to donate money to charitable causes, despite the fact that they no longer needed to itemize their tax returns and would not receive the deduction.

While there are many nuanced details in the Tax Reform Act of 1986 that I won’t go into here, note that up until 1986 there was a non-itemizer deduction for charitable contributions. Consequent research studies showed that the non-itemizer did not increase charitable giving in those categories and it was eliminated in 1986. Yet, as I have demonstrated through actual IRS data giving continued to grow.

Full disclaimer here, I’m not a CPA and even my husband knows I’m bad at math. Economics is not my favorite or best subject. I am only as good as my elementary understanding of the information I can find. But what I found gives me hope.

People Believe in your Missions

I am sure there are valid counter-points to my facts but I’m sticking by them for this reason: I believe that people give NOT for the deduction (not going to lie, it’s a nice thing to have) but generally because they really want to make a difference.

Are there exceptions to this generalization? Of course. However, the ability to make a compelling case for your mission when talking to donors is the place to focus your energy right now, not on how many donations you won’t be getting.

People give because they want to give and because we help them understand why it matters. And guess what? Your mission matters. Your organization matters. The people you serve matter.

One of the very best articles, I have read to date, on fund development strategy was sent to us by Scott Kern, Shadow Trackers, a business affiliate member of the Idaho Nonprofit Center and a great partner to the Center and our nonprofits.
The article is called “New Tax Law: How worried should your nonprofit be?” and is written by Claire Axelrad and posted on her Clairification website. She is described as a “fundraising ninja” and after I read her article I wanted to buy a plane ticket, hunt her down, and give her a big old hug of gratitude.

She makes the same case I am (but better!) with really great advice on how to capitalize on this most important fact: people and corporations will now have more money in their pockets. Let’s help them invest it back in our communities and mission-centric work.

I strongly encourage you to give it a read. Among some of the best advice, my favorite is this:

“Whatever you do, don’t buy into the negative publicity and use it as an excuse for failure. Focus on what’s within your control (solid fundraising), not what’s outside your control (tax legislation). Failure may be an option, but truly it’s a lousy choice. Especially when you have so many better options!”

Here at the Idaho Nonprofit Center we will continue to support and champion our collective work as nonprofits and do all we can to provide the resources, training, support, advocacy and information you need to grow and be successful, even in these uncertain times. We’re in this together.

Update - Withholding Calculator Released

The Internal Revenue Service released a new income tax withholding calculator to help employees assess their tax withholdings for 2018. For employees who need to change their withholdings, the IRS also released a new Form W-4. Nonprofits are encouraged to share these resources with their employees so they can make necessary adjustments to the amount of taxes withheld from their paychecks under the new federal tax law. The IRS also published a new set of frequently asked questions on tax withholding.

This was very valuable from the National Council of Nonprofits. All employees should revisit their withholding and it is a good practice to complete an updated W-4 form each year.