Giving For All the Right Reasons

FOR MANY AMERICANS, the tax cuts President Trump and the United States Congress delivered last December were the ultimate holiday gift. For the charities many of those taxpayers support, they were a lump of coal.

“Today’s passage of the Tax Cuts and Jobs Act will result in a decrease of $16 billion–$24 billion in charitable giving every year, significantly decreasing the philanthropic sector’s ability to provide resources and services to people across the United States and abroad,” the Council on Foundations lamented in a statement issued on December 22nd, after President Trump signed the tax reform bill into law.

Why would tax cuts that put more money into the pockets of potential donors elicit a loud “Bah, humbug” from nonprofits? The answer — unlike almost everything else related to the U.S. tax code — is relatively straightforward. By lowering tax rates, increasing the standard deduction and doubling the federal estate tax exemption, the tax act reduced the tax benefit most Americans receive from making charitable contributions. Theoretically that could reduce donors’ motivation to give.

“The thinking is that if Americans are taxed less, they will give less because they do not need the tax deduction for charitable giving as much as they did when they were paying higher taxes,” says Gillian Howell, philanthropic consulting and advisory executive at U.S. Trust. “The presumption is that most Americans give because of the tax break.” That is not the case with many high-net-worth taxpayers, and probably not with many Americans in general, according to U.S. Trust advisors who specialize in philanthropy and tax planning.

“People in this country gave money to charity long before we had a tax code,” says Ramsay Slugg, a wealth strategies advisor at U.S. Trust. “And people continue to give money to charity because they want to have an impact. They see a problem, and they want to fix it.”

The 2016 U.S. Trust® Study of High Net Worth Philanthropy^††† supports that analysis. Conducted with the Indiana University Lilly Family School of Philanthropy, the biennial study of the philanthropic motivations, priorities and strategies of wealthy donors found that just 18% of wealthy donors gave because of tax benefits. More important motivations were the mission of the organization (54%); believing their gift can make a difference (44%); and experiencing personal satisfaction, enjoyment or fulfillment (39%).

Changing donor behavior

The new tax law might not reduce the amount of money Americans contribute to nonprofits, but it might change how they give and the type of assets they donate. For example, a taxpayer might choose to bunch three years of donations into a single tax year to generate a charitable deduction that exceeds the standard deduction. He or she would itemize in year one to capture the value differential between the standard and charitable deduction and take the standard deduction the following two years.

The simplest means of executing that strategy is to make that outsize charitable donation directly to the nonprofit, but consolidating several years of donations into one large gift can stress a nonprofit’s planning and budgeting process, says William Jarvis, market strategy and delivery executive at U.S. Trust.

“Most nonprofits value a consistent level of support for their operating budgets from year to year to facilitate multiyear program planning,” Jarvis says. “They prefer a series of annual donations rather than one outsize donation every three years.” A solution that can work for both donors and nonprofits is putting multiple years of donations into a donor-advised fund, which would distribute the funds over the donor’s three-year time frame. “This allows donors to write off several years of gifting in a single tax year, and it provides the charities with a steadier funding stream,” Jarvis says.

Another strategy to enhance the tax efficiency of chari- table donations is to gift appreciated assets rather than cash. “Most people make gifts in cash, which is the least tax-efficient asset because it is an after-tax asset,” says Slugg, who suggests donors give stocks and other securities that have seen strong price appreciation. “If you donate appreciated assets, you get the charitable deduction, which reduces federal income taxes, and you don’t pay capital gains tax or the federal healthcare surtax on it, either,” he says. “So if you donate appreciated assets as opposed to just cash, you’re really hitting the trifecta of tax planning.”

Making generosity pay

Because most wealthy donors are not motivated by the charitable deduction, the 2017 tax act probably will not curb their giving. What it will do is make their generosity less advantageous from a tax standpoint. With proper planning, however, taxpayers still can do well by doing good.

“Taxpayers can still benefit from their good works,” Slugg says. “They just need to be a little smarter about how they give to reap those rewards.”