The Impact of Taxes on Giving in 2010 and 2011

Time for Special Strategies? The Impact of Taxes on Giving in 2010 and 2011
by Robert I. Evans and Avrum D. Lapin

The U.S. federal government has been whispering for many months about impending and sweeping changes to the U.S. tax code. Last week, President Obama announced his intentions to let Bush-era tax cuts expire on December 31st, thereby eliminating certain tax incentives that have benefited higher income tax payers. With the likely end of a special set of longstanding tax incentives to some of the highest income earners, we considered how these (and other proposed) changes to the tax code might possibly impact charitable giving, especially in the final months of 2010 as well as how this may affect giving in 2011.

While history has shown that tax incentives have never been a significant motivating factor for encouraging individuals to give charitably, we have seen that taxes can factor in to how major gifts will be structured and when they will be made (i.e. what time of year).

We believe that this will hold true in the coming months and throughout the next calendar year, especially as households with combined annual incomes of $250,000 (or individuals with annual incomes of $200,000) will return to the Clinton-era tax rates. These proposed changes require non-profits to be especially strategic in their year-end outreach to donors . . . just as it necessitates that higher income taxpayers create appropriate strategies to maximize charitable giving within the changing tax framework.

We reiterate that the introduction or absence of tax incentives will probably not cause a major giver to make or withhold a gift; however, it may cause them to readjust their giving patterns and to re-think the timing of payments on the short term.

Note what history reports on tax code changes. In 1986, the last sweeping changes to U.S. federal taxes, donors made significant year-end charitable gifts, often representing pre-payments of gifts they would have made in 1987. Giving USA reported a substantial decline in giving in 1987, primarily attributed to the 1986 tax changes. Giving levels returned to more normal rates in 1988 and 1989.

In talking with one knowledgeable tax expert, we see several possible scenarios which require planning and preparedness on the parts of non-profits as well as donors.

Scenario #1: new taxes or new tax schedules introduced for 2011 that discourage deductions.

This possibility (which seems likely, our expert predicts) would propel charitable gifts in 2010 and perhaps dampen giving in 2011. Especially likely to be impacted positively are gifts to donor-advised funds and charitable foundations as well as multi-year pledges to various causes where 2011 gifts would be paid earlier. This is of particular interest, given the impact on giving to foundations during the downturn in the economy over the last few years.

Scenario #2: new tax schedules for 2011 that reflect slightly reduced rates for dealing with appreciated securities and charitable and other deductions.

Under this approach, donors would hold back on 2010 payments until January 2011 (or later) to maximize the tax benefits.

Therefore, as we look at the last quarter of 2010, we project unprecedented short term changes in giving strategies by donors as a result of laws that will be enacted and what tax changes will mean for people of all income levels. As a result, we could either see an unusually strong fourth quarter of charitable giving and a somewhat weaker start and possible finish to 2011 or slowing of gifts until the new calendar year.

Note, however, that with the uncertainties of the possible tax code changes, almost all tax payers will see impact on their own situations, even though the economic environment today is much more complex and clearly much different than it was in 1986!

What does this mean for non-profits?

Here is the strategy that we suggest:

  1. Create alternative strategies immediately, still calling for significant and aggressive outreach for payments immediately. Stay out in front of any prospective changes.
  2. Begin immediately to tackle year-end giving outreach as you would every year. Note that changes to tax codes have rarely created long term changes in giving patterns. Do not wait for “clarity” resulting from the November elections or changes to the tax codes. People respond to the case for support and not only the size of the deduction; charitable intent comes from the heart.
  3. Assess the impact of changes to the tax codes and history of these changes to philanthropy. Consider communications efforts, perhaps together with national associations, with other non-profits or with national agencies, to convey your views and the potential impact of reduced charitable giving on your organization.

As always, we stand strongly that the fourth quarter presents a critical opportunity for non-profits as they try to end the year on a note of strength and present a picture of success to supporters.

With demonstrated achievement in 2010 you will be able to prove to your donors that they truly made an impact and have helped your non-profit to move forward on the path to success. Ending 2010 in a strong way – regadless of the political winds – will be a key factor to keeping your donors engaged and confident in the strength of your non-profit.

Continue to convey an honest picture: what have you accomplished, what areas really need improvement, where funding is lacking. Donors are not expecting to see a return to pre-recession levels but they are expecting to see improvement, growth and transparency. Employ strong and strategic outreach methodologies for the fourth quarter and then transfer that same proactive, aggressive spirit into the creation and introduction of plans for 2011.

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.