A Giving Boom in 2017?

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Thirty years ago, when nonprofits closed out fundraising efforts for 1986, the final tallies brought a welcome surprise to many. That year, charities in America recorded a nearly 15 percent jump in donations — the largest increase in the 61-year history of the “Giving USA” report.

Though the stock market and economy were strong in 1986, Congress had a big hand in the giving surge. It had debated tax reform throughout the year, then passed a massive overhaul that cut rates dramatically. Many donors, recognizing that lower rates would reduce the tax savings they could get through charitable deductions, rushed to make gifts before the new law took effect on January 1.

Could 2017 see a similar spike? Congress is again poised to pass a major tax overhaul, with both President-elect Donald Trump and key congressional Republicans signaling that it’s a top priority. The environment for major changes in tax policy is the best it has been in years, according to Shahira Knight, vice president of government relations at Fidelity Investments. “It looks like the moon and stars are aligning,” she told financial advisers in a webinar on charitable giving in early December.

Any tax package that passes will likely include a reduction in income-tax rates, experts say. Less certain are provisions that directly affect charitable giving, such as elimination of the estate tax or a cap on deductions.

Once passed into law, any of these measures will likely depress charitable giving. The independent Tax Policy Center estimates a drop of between 4.5 percent and 9 percent in the first year.

In the short term, however, anticipation of those changes could fuel giving. Some donors are already accelerating giving to lock in favorable tax benefits. In December, the National Philanthropic Trust saw “aggressive” giving, according to its president, Eileen Heisman. Up to 70 percent of financial advisers calling the trust cited the muddled tax picture as motivation for their clients’ gifts, she says.

“Nobody really knows what a Trump administration is going to look or feel like,” she says. “There’s nervousness about the unknown.”

Fidelity Charitable has urged donors to consider the potential benefits of “front-loading” giving. “The bottom line is, waiting to give could significantly diminish someone’s tax savings,” explained Jill Weiner, the donor-advised-fund provider’s chief compliance officer, in the webinar with financial planners.

Big Savings for Big Donors

Currently, the marginal federal income-tax rate for the most wealthy Americans is 39.6 percent. At this rate, a donor who makes, say, a $1,000 charitable gift will net tax savings of almost $400. If Congress cuts the tax rate, donors would see reduced savings. Plans pushed by Mr. Trump and House Speaker Paul Ryan would trim the top tax rate to 33 percent, meaning that same $1,000 gift would net only $330 in tax savings.

Though that reduction may seem minor, a tax cut has large effects for donors who have pledged big gifts or are contemplating a large donation. Consider someone who’s committed to a $5 million gift to be paid in annual installments over five years. Paying the total upfront instead, before the tax changes, could save the donor $330,000.

Many high-income donors made just such a calculation in 1986, experts say. Patrick Rooney, a professor at Indiana University’s Lilly Family School of Philanthropy, and his research team have studied the effect of tax changes on giving that year. They estimate that the anticipation of tax cuts had seven times more impact than the 18.5 percent increase in the Standard & Poor’s stock-market index.

But Mr. Rooney warns that such a spike is temporary, as reducing taxes chiefly accelerates giving plans already made. The tax cut may appear to be stimulating giving, he says, “but it’s not stimulating a new gift; it’s encouraging an existing pledge to be paid earlier.”

Source: Giving USA

Fear and Giving

It’s impossible to predict how talk of taxes will affect giving this year. The income-tax cut called for by Mr. Trump and Mr. Ryan is considerably less than what passed in 1986, when the top rate dropped from 50 percent to 28 percent. At the same time, debate about other provisions could spur giving driven by fears that charitable deductions will lose considerable tax value, according to Williams College economist Jon Bakija.

“There’s uncertainty because anything can happen,” he says.

Some in philanthropy reject the idea that tax incentives drive a significant amount of donor behavior. “For the families, foundations, and businesses that I work with, taxes are certainly a factor, but they’re not the driving factor,” Denver philanthropic adviser Bruce DeBoskey says. “The people who are engaging me want help to make more of a difference, not get a better tax break.”

David Dalessandro, associate vice president for development at the University of Pittsburgh, says he’s seen no rush of donors worried about tax consequences. Though he’s keeping an eye on provisions regarding capital gains and the estate tax, he thinks that a change in the marginal tax rate will have little effect on those who make major gifts of $100,000 or more. “People with that kind of wealth aren’t paying 39 percent anyway,” he says, thanks to other tax breaks available to them.

Ultimately, any predictions about 2017 giving will likely get upended by wild-card policy ideas that emerge as Congress hammers out a deal. “If we’ve learned anything from the past year,” Mr. Bakija says, “it’s that predictions concerning Donald Trump are very likely to be inaccurate.”