The Tax Cuts and Jobs Act of 2017 (TCJA) dramatically altered the U.S. tax code, with broad changes that affect individuals, families, businesses and even nonprofit organizations. A number of the legislation’s components appeared at first glance to discourage the charitable giving that sustains NFPs.
By greatly expanding the standard deduction, eliminating several longstanding itemized deductions and limiting deductions for state and local taxes, TJCA was expected to lower the number of filers who choose to itemize deductions on their returns. The logical outcome would be fewer taxpayers who could benefit financially from making charitable donations. In addition, a major expansion of the estate exemption held the potential to reduce giving by wealthy households as a strategy to reduce tax liability.
In terms of the net government subsidy of charitable gifts, TCJA reduced the rate across the board. However, the amount of this change varies significantly at different income levels. According to the Urban-Brookings Tax Policy Center, middle income earners would see the biggest relative drop in estimated effective marginal tax benefit from giving while the top one percent of earners would be affected only slightly, with the marginal benefit of gifts dropping from 30.5 to 28.9 percent.
Taking all these factors under consideration, economic researchers predicted a drop in charitable giving of that ranged from 4 percent to roughly 5 percent. So what actually happened to charitable giving in the first year following TCJA’s implementation?
Well, it dropped. Giving declined by meaningful amounts in 2018: individuals donated 3.4% less than in the previous year and overall giving dropped by 1.7 percent (both figures adjusted for inflation). It’s not all bad news though; without adjusting for inflation, charitable giving from all sources rose 0.7 percent. Total numbers also mask the fact that while individuals donated less, giving by corporations grew sharply and foundations donated more than ever before in terms of actual dollar amount – both current and inflation-adjusted.
Any way you interpret the numbers, changes to charitable donations in 2018 stem from multiple factors that aren’t limited to the effects of a revised tax code. A generally strong economy supported giving more than at some periods in our country’s history, and rising stock prices enabled corporate and foundational donors to be particularly generous.
Long-term effects on charitable giving from TCJA are still undetermined. When the economy pulls back and the stock market hits another inevitable down period, will nonprofits face calamity? Will individual donors continue their largesse by adopting an alternating year gifting pattern, as many financial professionals advise? It’s too soon to tell for sure. Even nonprofits that saw relatively stable giving in 2018 are wary of what comes next, and for good reason.
Predicting the future has never been easy, nor have prognosticators traditionally been universally on target in their assessments. Making long-range financial plans in this complex and volatile environment simply isn’t possible, so nonprofits must by necessity adopt a wary stance as they try to shore up reserves for a potential prolonged decline in donor funds. At the same time, there’s a reasonable possibility that future administrations could repeal many of TCJA’s disincentives to giving, adding further uncertainty to the mix.
The best approach for nonprofits in 2019 is to do what they can with current resources and take an active stance in seeking new donations from individuals as well as institutions. While today’s transitional concerns will eventually evaporate, new questions and policy shifts are sure to take their place. NFP leaders should attempt to stay mission-focused and bear in mind that as with all things, this too shall pass. For help riding out the surprises and making the most of what each new year brings, turn to the experienced nonprofit advisors at HBP.