Do Taxes Impact Philanthropy?

by Robert I. Evans and Avrum D. Lapin

We all live by the old adage there are only two guarantees in life: death and taxes.

With the annual U.S. federal tax deadline on Monday (this year extended to April 18th) Americans will hopefully precede the other inevitability. As we have reviewed last year’s expenses with our accountants and financial gurus, we calculate anything pertinent that can possibly increase our refund check or in many cases decrease the amount we owe to Uncle Sam.

One of the hot topics on Capitol Hill currently is the growing whispers coming from the National Commission on Fiscal Responsibility Reform to cap charitable deductions at 28%, thus reducing the tax incentive to a 12% tax credit for donations that exceed 2% of the donator’s adjusted gross income (AGI). There are other strong indications that the U.S. federal government could be realigning the entire tax code system for the first time in 25 years.

It is important to recognize the changing philanthropic landscape that can be altered with any major tax overhauls. In some ways, it may seem like a crushing blow to the nonprofit sector, with more than 1.4 million non-profits and untold hundreds of houses of worship relying on maintaining the flow of philanthropic dollars driven by the tax incentives to contributors. The fear relating to possible tax code changes is that it would create a domino effect potentially decreasing financial support and, as a result, challenge organizations to make hard choices regarding the “tightening of their belts” and possibly reducing programs and services.

When the tax code was last overhauled in 1986, there was a significant decline in giving in 1987, to a large degree due to wealthy donors accelerating charitable gifts for the coming year in the last months of 1986. Giving “normalized” in 1988 and thereafter, reflecting a short-lived reduction in giving and a return to steady growth.

In today’s philanthropic climate, the after effects of a tumultuous economic decline during the past few years coupled with a proposed tax code overhaul for fiscal year 2012 does highlight some warning signs for the 2011 and 2012 giving forecast.

As optimistic and vigilant fundraising professionals, our approach is to move ahead strategically but also to consider the tax code changes as how high net worth donors – and others – could understand the changes and still achieve their philanthropic goals. As the new tax codes seem to some to represent a deterrent to larger donations it can and will be counter-balanced by the recent positive though ever so gradual national and global economic recovery. To translate, as individuals feel more financially secure within the economic recovery, they will expand their philanthropy and will not be swayed by tax credit limits.

As many pundits and political figures may belabor the various aspects of new potential policies, we must still recognize the current rules of giving for the 2010 filing year and probably for years to follow:

  1. Donors need to keep records of everything donors do for nonprofit causes, beyond just charitable support. For example, they can legitimately write off the miles traveled to and from activities of all types. Of course, non-profits need to provide proper acknowledgements to their donors.
  2. Donors should keep records of donated tangible goods. They all have value, which could be deducted. This includes non-cash gifts such as appreciated securities and tangible possessions such as art work, real estate, antiques, furniture, clothing, and cars. Corporate and business contributions in 2009 of software, hardware, and drugs amounted to substantial in-kind charitable support.
  3. It is important that donations are given to an organization as opposed to an individual. The rule of thumb is the IRS needs a paper trail. An example would be that a cash donation into a youngster’s tzedakah box may not be counted as tax deductible but writing a check to the youngster’s Hebrew School can be considered as an acceptable tax-deductible donation.

Truth be told … most individuals do not give to charities because of major tax incentives. According to Sandra Sims of “Step By Step Fundraising,” over 70% of adults have donated money to a charity and more than half of them neglected to file a short form, thus disqualifying them from receiving a tax benefit in that year of giving. Truly there are other purposes of charitable giving. The reality is that the gift is usually more than the deduction anyway. People generally give because they are passionate and care about a cause or someone who they care about asked them to give. In our profession, that cause is to see a Jewish program evolve, a new house of worship created, a project transforming the community and in general a community working together in unison for a better purpose.

Everyone dreads that mid-April deadline of filing their taxes but it is important to realize that Americans are still a nation of donors. Moreover, our society has carved out a role for the philanthropic sector and thus we must also see ourselves as a nation of giving – whether through “passing the plate,” folding tabs on high holy day appeals, or by being a major donor who may forever change the course of a valued community asset.

The incentive for deductions is surprisingly less of an individual mindset than most might think. Harvard Economics Professor Martin Feldstein stated in a recent publication entitled “The Income Tax and The Charitable Donation” that only half of the largest donors (those with household or personal incomes of $100,000 or above) cite the incentive for their giving and 30% of donors with lower incomes ($50,000 and below) cite tax incentives as their reason for giving.

There are larger reasons that address why individuals may discontinue giving other than tax disincentives. According to a “2008 Study on High Net Worth Philanthropy” by the Indiana University Center for Philanthropy, the top reasons for not giving were “the feeling of no longer feeling connected, a desire to support other causes and distrust in the management of their donations.” Very few, if any, suggested the tax ramifications. Thus, whether the U.S. tax code changes in 2012 or not, non-profits that address mission, vision, and transformation will continue to attract the attention of major donors and receive the support that they seek and require.

Robert I. Evans, Managing Director, and Avrum D. Lapin, Director, are principals of The EHL Consulting Group, of suburban Philadelphia, and are frequent contributors to EHL Consulting works with dozens of nonprofits on fundraising, strategic planning, and non-profit business practices. Become a fan of The EHL Consulting Group on Facebook.