The New Tax Law: How It Will Impact Your Nonprofit Organization and 5 Solutions to Mitigate Your Risk
While many of us were awaiting a well-deserved holiday break, we started to hear rumblings of the possible unintended consequences of the new Tax Cuts and Jobs Act of 2017 for nonprofit organizations. Some think that charitable giving was overlooked in the final analysis. According to the Urban-Brookings Tax Policy Center, the new law could lead to reductions in charitable giving (as much as $20billion) and, as a result, the loss of nonprofit jobs (as many as 220,000). Others believe extra money in the pockets of Americans will lead to more giving. We know there are a lot of questions about how the new tax law will impact nonprofits. In this post, we cut through the clutter with a quick digest of potential issues affecting nonprofits and provide solutions that can be deployed today to mitigate risks. As my mother (and Cicero) would say, “Hope for the best, prepare for the worst and take what comes.”
Issue #1: Higher Standard Deduction — In an effort to simplify tax returns, fewer individuals will itemize — dropping from 25% to 5% of Americans. While tax deductions motivate some to give, others give for many other reasons. Based on past trends, donors giving $5,000 or more are likely to still itemize. So, the most vulnerable group to this change is likely the largest — middle-income donors giving between $100 to $5,000.
Issue #2: Lower Marginal Tax Rates — While this only impacts the likely 9 million individuals who will still itemize, the lower tax rates will mean that these donors will get less in return for charitable efforts. For example, lowering the top tax rate from 39.6% to 35% means the charitable deduction would be worth 35 cents on the dollar instead of 39.6 cents now. It is hard to know if this will impact charitable giving, but some estimate it could lead to $2.1 billion lost.
Issue #3: Higher Threshold for Estate Tax — In an effort to reduce fear around the so-called “death tax,” the law increases the threshold for those estates subject to the federal estate tax from $11.2 million for couples to $20.18 million. For example, this would decrease eligible estates in 2017 from 5,500 to 1,700, which represents only 0.1% of all U.S. deaths. This will likely reduce interest in estate planning and planned giving, which could lead to a substantial decline in transformational community gifts from wealthy families often given to the arts, colleges or hospitals.
While this all seems concerning, there are many ways to think proactively about how this might impact your nonprofit. All nonprofits are at risk, but those who rely heavily on individual giving and have many donors in the middle-income category who will no longer itemize are most at risk. The good news is many of these solutions are best practices that will help any nonprofit ensure it stays relevant. So, consider this an upgrade in how you think about and communicate with your donors.
Solution #1: Monitor giving month-by-month, especially for high-risk donors — We highly recommend donor segmentation and growth/loss analysis over time. When a change happens, it is important to analyze why it is happening and have conversations with the donor segment about it — even if you are doing well. This year, you’ll want to closely monitor the middle-income segment that will be impacted by no longer itemizing their taxes. Donors who have been consistent in giving will be less likely to change their habits. However, the new tax law could impact new donors, so you may want to deploy better retention techniques early on to keep them.
Solution #2: Offer “bundling” options — Some taxpayers were already bundling charitable contributions by giving every two or three years to maximize their tax deductions. We believe this trend will continue with tax reform. This year, you may want to offer gift options that allow for this timing and structure. Or, consider working collaboratively with a local foundation or bank to introduce donor-advised funds to affected donors. These funds offer donors many tax advantages, but allow for annual operating support to nonprofit recipients.
Solution #3: Elevate messaging — We have always believed that nonprofits should lead with messages around their unique value proposition and find ways to stand out from the crowd. This year, messaging around tax deductions is likely to be less appealing and possibly even annoying to some impacted donors. We recommend focusing more on the value you bring to the community and your clients than the value of tax deductions to donors. You may also want to go deeper and try messaging to each donor segment. Based on donor research we have done with clients, different messages work at different life stages as well as at different motivation and engagement levels.
Solution #4: Rethink your fundraising schedule — Because there will be fewer taxpayers itemizing, end-of-year annual appeals will be less compelling, except to those inspired to give during the holiday season. This gives nonprofits an ability to communicate with donors on a regular basis throughout the year, which we encourage anyway. It also means that these appeals need to find new and better ways to create a sense of urgency and importance in the mind of the donor.
Solution #5: Upgrade your portfolio — Many nonprofits will need to change their approach to planned giving. The good news is that there is now less red tape associated with estate planning, so more nonprofits can participate. The bad news is that with fewer eligible individuals, there will be more competition.
No one can predict how the Tax Cuts and Jobs Act of 2017 will truly impact the social sector yet, but we can all take reasonable steps to mitigate its impact by rethinking our fundraising and communications strategies and resource allocation. We welcome any additional solutions you are considering.