Nonprofit fundraisers face a new reality when it comes to the tax treatment of charitable giving. The Tax Cuts and Jobs Act, signed by President Trump last December, preserved the charitable deduction. Still, it increased the standard deduction, the estate-tax threshold, and the limit on adjusted gross income a taxpayer can write off with gifts to charity.
To decipher the implications for nonprofit leaders, the Chronicle assembled a trio of experts for a recent webinar. Watch the webinar above, or read the transcript below.
TRANSCRIPT
MEGAN O’NEIL: Good afternoon, everyone. Welcome to today’s Chronicle of Philanthropy webinar on charitable fundraising under the new tax law. Thanks for joining us. I’m Megan O’Neill a journalist with the Chronicle. I report on nonprofit finance and management, among other topics. I spent a lot of time in the last year reporting on the passage of the tax bill and the implications, of course, for 501c3’s. So I’m really grateful to be here with you today. It’s possible today, you may want to share some of what you learn with a colleague or a boss. So if you’d like to print out the webinar slides, you can do so by clicking on the orange tab labeled Resources in the top right corner of your screen. The orange tab is also where are you’re going to find some resources from the sponsors of today’s webinar. The two sponsors are NACHA, or the Electronic Payment Association, and Berdon Accountants and Advisors.
I know it sounds like a little hokey, but the truth is, producing high quality journalism is actually quite expensive. And my colleagues and I were able to produce and offer this webinar for free today to the Chronicle audience because of our sponsors. So I just really want to thank them. They’ve been very generous. We’re going to kick it off here with a brief poll question. We just kind of wanted to see where audience is, get a sense of what you all are seeing and hearing in your daily work as it relates to changes in the federal tax law.
So if you could just take a quick minute to go ahead and read and answer the question you should see here on your screen. Have you received a confused or befuddled question about the new tax law? There’s a couple of option answers there. So I’ll just give you about 20 seconds to answer that. If you’re sitting with colleagues in a conference room or something, hopefully you guys can come to consensus on a good answer and then I will return to the responses here in just a couple of minutes that way you guys can know where your colleagues across the country are with this new tax law.
In the interim, I’m just going to start briefly speaking to you about our webinar guests. We have a trio of terrific guest speakers for the webinar. There are folks who are at the top of their field. I don’t even want to know what their hourly consulting rates would be. And they’re here because they believe this stuff is important and they want to help us all get a little bit smarter at it. So I’m going to start with introductions here. Robert Sharpe is a nonprofit tax policy expert and chairman of the consulting firm The Sharp Group. He does a lot of consulting on a lot of different types of charitable fundraising, but perhaps most notably major gifts and planned gifts for colleges, universities, hospitals, other institutions. I also just want to mention that Robert Sharpe has spent a fair bit of time here in Washington on Capitol Hill, lobbying to people like Paul Ryan.
So this is a guy who’s part of the sausage making, if you will. We’re really lucky to have him on this call. Robert, thanks so much for joining us. Next we have Greg Sharkey. Greg is a senior philanthropy advisor with the Nature Conservancy. His work includes helping donors consider their charitable goals and counseling donors on the most effective and cost-efficient means to achieve their philanthropic goals. Greg, thanks so much for being here.
GREG SHARKEY: My pleasure, Megan. Great to be with you this afternoon.
MEGAN O’NEIL: Finally, we have Sheryl Aikman. Sheryl is vice president of development at the Community Foundation of Western North Carolina. That’s $370 million foundation serving an 18 county region. She’s been a staff member there since 1998. She has served in multiple national leadership roles for the community foundation field, including as a peer reviewer for National Standards for US community foundations accreditation. Sheryl, thanks so much for joining us.
SHERYL AIKMAN: So glad to be here, Megan. Thank you, and the Chronicle, and the sponsors.
MEGAN O’NEIL: Just briefly, a couple of quick housekeeping items here before we launch into the content. If you are tweeting, we ask you to use the hashtag philwebinar. After we’re done today, I am likely to tweet out a couple of additional resources and articles related to the tax law and fundraising. So you can find those all there under that hashtag. We do welcome questions. We’re going to be conducting a Q&A here at the end of the presentation. If you’d like to submit a question, please type it into the box in the lower left hand corner of your screen and hit Submit. We’re going to get through as many of these as we can at the end of the webinar.
God forbid, if you should have technical problems and need technical assistance with the webinar, please submit a request for help through the tech support widget. It should be pretty visible there on your screen. Lastly, today’s webinar slides will be available for you to view at your convenience beginning next week. You can look for an email from us in a few business days. You can watch on demand and you can download the slides. All righty, so I’m going to kick it off here.
During the 2016 presidential election, Republicans promised to overhaul the tax code. In December 2017, they delivered when President Trump signed the Tax Cuts and Jobs Act into law. It included a big tax cut for corporations, as well as a reduction in income taxes for most individual American taxpayers. It also ushered in a new era in the tax treatment of charitable giving, nonprofit operations, and management. I’m just going to turn briefly back to our poll here that you all participated in and just give you a feel for what we’re seeing from the field. A little over 27% of you responded that, yes, you received several or many questions about the new tax law. A little over 38% of you said that you’ve gotten one or two. And 34% of you said not yet, but you suspect you probably will be here in the coming months.
And I’m going to guess that’s why you’re here joining us. So now I’m going to hand this over to Robert Sharpe. He’s going to walk us through what the law actually says. So Robert, can you go ahead and let us know what’s in the dang thing?
ROBERT SHARPE: Sure, well thank you very much, Megan. And again, it’s pleasure to be with you this afternoon. My portion and this is to give a brief overview of just the technical aspects of what actually happened in the law. And then Greg and Sheryl are going to do a little more in-depth interpretation of some strategies and communications, approaches, et cetera. So we’re going to look at what changed under the law first and then what didn’t change. Now, as we’ll see in a minute, nothing really changed insofar as the charitable deduction itself is concerned. But other things happened that affect greatly the use of the charitable deduction.
The standard deduction, which is the amount that you’re allowed to deduct whether you give to charity, whether you have mortgage interests, whether you pay state taxes, that has doubled for individuals to $12,000. Those over 65, $13,600 and $24,000 for married couples, under 65 and $25,600. Now what this means is that people who don’t give to charity, don’t pay mortgage interest, whatever, they get this whether they engage in these other behaviors or not. But if you give to charity and your total deductions are less than these amounts, you get basically no benefits from a tax standpoint and you have to make your gifts from after tax dollars.
What that means is if you’re in a 33% bracket, let’s say, and you want to give $10,000 to charity. If you deduct it, it takes $10,000 worth of income. If you don’t deduct it, it takes $15,000 worth of income. You have to pay $5,000 in taxes to end up with $10,000. So that’s where the concerns are of the impact. And we’re going to talk about that and who’s affected by the new non-itemizers and what are some strategies to deal with that.
All right, so in addition to the standard deduction being increased, mortgage interest was capped, and set for mortgages at $750,000 down from a million. That doesn’t affect a lot of people but there are parts of the country where million dollar mortgages are not that unusual for two earner families in expensive areas. And they’re going to have less ability to deduct their mortgages. And more importantly for people in high tax states, high property, high income tax, they’re only going to be able to deduct $10,000 worth of state and local taxes. And that’s a tremendous reduction in the ability.
So you have to meet those standard deductions with less mortgage deduction and less property taxes in many cases. OK, so what does that mean? Well, we got to put this in perspective. Only 30% of people, according to a number of studies, itemize under prior law. 70% of donors did not itemize their deductions. However, the 30% who itemized, steadily, every year, gave about 80%. Now it’s estimated that that’s going to drop to 10% of taxpayers will itemize. But if you look at the income groups affected, you’re really still looking at about 50%-- over 50% of individual gifts will still be itemized on tax returns.
So we’re really looking at a bifurcated two tier system here, where approximately half of individual donors will be concerned with their tax benefits for giving, and about half will not. See on the screen there is pocket tax guide that goes through all of the different rates and the changes and whatever. This is one of many things available in the marketplace, just something we happen to produce for use with advisors, primarily. So if you get-- so we have to keep in mind, as I mentioned earlier, most of your major donors, people that are giving in the thousands of dollars, $5,000 and up level, those people are more likely to continue itemizing.
They have higher mortgages. They’re more likely to hit the $10,000 state and local tax limit. But we need to keep in mind the fact that even if they do continue to itemize, tax rates went down some. So if they were deducting against a 39% rate, or 39.6%, and now their maximum rate is 37%, then it’s costing them $0.02 more per dollar to give. So I don’t think that’s going to make a big difference. Someone giving $10,000, for example, the tax savings dropped from $3,900 to $3,700. I don’t expect that to have a lot of impact. As we’re going to see in a minute, something called the Pease limitation removal actually overrides that additional cost for higher income individuals.
OK, so one thing we need to know in looking at our demographics, single people are more likely to itemize than married people. Why is that? Because the standard deduction is just $12,000 for single people. And the state and local taxes, property taxes and income taxes, sales taxes, you can deduct up to $10,000 there. So you don’t need much in the way of mortgage in addition just to the state income and property taxes to meet the threshold. So all of your single individuals will be more likely to itemize than married couples. Now, a good thing that happened under the law that we lobbied for extensively to help older donors especially, the AGI limit, the amount that you can deduct is limited at 50% of AGI under the old law for cash gifts. That was raised to 60%.
So again, even if people who have slightly less savings because of bracket change, if they’re giving large amounts, they’re going to be able to benefit from the deduction sooner than having to carry forward. No no change in that for non-cash gifts. Well, why is this important? Most of the people that are affected by the AGI limits tend to be over 65 years old. In the most recent year we have data for, there were $34 billion deducted in that year, 2014, for gifts that were made in prior years.
To put that in perspective, that’s more than has ever been received in bequest in a particular year. It’s a lot of money. And 76% of that money comes from people over 65 years old who tend to have higher incomes but less reportable income, so they tend to hit those limits. So that’s a good thing for older individuals. That’s the most people who will benefit from that. Now, what about this Pease limitation? This is important and I know Greg’s going to mention it later. This was a law that was passed in 1993 that was designed to slightly increase taxes on higher income individuals, people that were in the $250,000, $300,000 and up income range.
It was decided that they could still deduct their gifts and other deductions but they would have to reduce those deductions by 3% of the amount of their income over a certain amount. The repeal of that, that 3% reduction going away, is greater than the 2% reduction in the income tax rates. So if you do the math, and I’ll show you where this hits in a second, if you do the math, you’ll find that the highest income people actually benefit more from their deductions than they did under the old law. And we’ve all heard about how this law primarily benefits people in the top 1% of the top 1%, just another example.
If a couple has an income over a million dollars, two people making $500,000, their cost of giving and other deductions is going to go down about $900,000 income for singles. So that’s something very important to keep in mind when talking to your lead donors, your really large donors. You need to point out that they may actually come out better. Under the estate tax, there was the estate tax was doubled. Exemption was doubled. This is sort of like the standard deduction, only for estate taxes. What this means is that a person with less than $11.18 million pays real estate tax, about $22 million for a couple. Only about 2,000 people a year are going to die estate taxes. 99.9% percent will not owe any estate tax.
Well, what about states that impose estate tax? Won’t that still-- yes, that’s still there. But if you look at the population, about 65% of people live in states like California, and Texas, and Florida where there is no estate tax. That’s one reason a lot of people move to those states to retire. So again, one take away here is, don’t spend a lot of time in your marketing talking about making gifts to avoid estate tax because that’s not going to-- that’s just not going to have any traction for only the top 1/10 of 1% it applies to any more. Now, the good news is, early studies from US Trust and others, and you can download this from their website, show that 92% of people, wealthy individuals, say that this change in the estate tax will not affect their bequest giving. In fact, many said that they would leave more money to charity because they no longer have to pay any tax on the money left to their families.
So, that’s an interesting read if you want to go and download that as well. OK, so what didn’t change? As I mentioned, the charitable deduction was completely untouched itself. It’s the use of it and the extent that you can use it that changed. There were all kinds of things proposed over the last five or six years since 2010. This process really lasted five years. And we worked on it and knocked out all kinds of -- 2% floors to only people that gave above average would get the deduction. There was a $100,000 ceiling that was put on. There was a limitation of real estate to cost basis, all sorts of things were proposed and we were able to beat those all back and end up with an increase in the limitation AGI from 50% to 60%.
Now, a lot of donors have read all this bad press. And again, there’s a lot of confusion out there among even some of the wealthier and more sophisticated donors. On your screen here, again, you see this guide to effective giving after tax reform. Again, there’s a lot of materials out there available from different sources. This is something that we have produced for use with donors to put the content of this webinar in effect into plain English that donors can understand. And again, if you Google Sharpe tax law, you’ll find links to that if you’re interested in reviewing that.
OK, what didn’t change? Gifts of securities and other property like real estate not affected. Very, very important. If people are no longer itemizing deductions, they’re going to look to give securities and real estate because you don’t have to be able to-- there are benefits whether you deduct or not. In many cases, the big savings is on capital gains. And capital gains taxes is not due unless there’s a sale. And a gift is not a sale. So the capital gains tax advantages continue with or without the ability to itemize. Important point-- it’s an important take away point. Another area that wasn’t changed was IRA rollover gifts. This is going to be even more important than ever for donors over 70.
The first baby boomers turn 72 this year. This is going to be the gift of choice for upper middle, and upper income baby boomers who have millions of dollars. Directing $10,000 to do an annual gift, just calling up your Fidelity or whoever and sending the money directly to the charity, that’s a whole lot easier and more painless than writing a check for $10,000, which you probably don’t have in your checking account anyway at that point, especially for seniors who are not itemizing. We’re trying to get an above the line to deduction so that everyone can deduct up to at least a certain amount above the line, whether they itemize or not. But this IRA provision is, in effect, a targeted, above the line deduction for seniors who can afford to give from their IRA. Not reporting the income, sending it directly to charity, is the same thing as reporting the income and having it be fully deductible.
So again, make sure that-- and don’t wait till the end of the year to talk to people about that because they only have so much they are required to withdraw. And don’t wait till the end of the year when they’ve already made their withdrawals. Also, split interest gifts like gift annuities, charitable remainder trusts, lead trusts, not affected one iota. Nothing. So those are still there and they’ll be more important because a lot of people that’s in their 70s, they might do a gift annuity or something every year for $25,000 to push themselves. A $25,000 gift annuity has about $12,000 charitable deduction. Voila, you’re now an itemizer for everything else that you can’t itemize, including your other charitable gifts.
So we’ll be using these things not only to produce income, but the current tax benefits will create a floor that will be helpful for some people. So when are donors going to start thinking about this? Well, it’s a little bit it’s a little bit early to tell. As I said, the press has been mostly negative. There’s some positive. This month’s issue of Forbes magazine has a very positive article aimed at higher income individuals telling them about the impact appeasement and some of the other things we’ve talked about. But again, we’ve got a lot of education task and opportunity ahead of us.
One thing that we need to be aware of is there’s a pretty good chance that giving will actually decline in 2018. But it will not necessarily be because of any of the things we’ve talked about. When you go back and look at prior tax reforms, going back into ’86 and other big years, you’ll see that the largest increase in giving ever, percentage-wise, was in 1986, the year before that tax reform, the year before ’87. The percentage of individual giving actually declined in 1987, not because people-- not because of the law, but because people followed advice and they doubled up on their giving in ’86.
If they normally gave $5,000, they maybe gave $10,000 in ’86 or $10,000 in 2017. They’re not going to give that $10,000 again in the fourth quarter of ’18, probably. They may go the regular $5,000 or they may give nothing because they doubled up the year before. Who knows what’s going to happen there. But history shows us that this has happened before, a number of cases. If you go back to 1970, for example-- hold on, yeah, 1970. After the ’69 act, low growth year. Same thing happened in ’81, ’82, and again in ’86, and again in ’94. So the most important thing here is to be aware of the possibility that some donors, excuse me, some donors will not give as much as they did last year.
They won’t repeat the accelerated gifts. The main thing here is to be positive, inform donors of all the advantages because some people were confused last year and didn’t give what they might have. And now they need to be told the good news. But it’s important to set management and board expectations properly. And just maybe when you download this, show these charts to management and say, it’s possible. But no matter what we do, we may have to go through a slight decline in growth or even an actual decline in 2018.
All right, I’m going to turn it over now to Greg and he’s going to talk about some of the strategies that people can employ to effectively meet these challenges in the new law.
GREG SHARKEY: Thanks very much, Robert. So let’s dive into the good news. And Robert has mentioned a lot of this in his comments. Lower tax rates pretty much across the board for most individuals and for corporations. And that is good news in that those entities now have more disposable income and donors can do a number of things with that disposable income. They can spend it. They can save it. And they can also make larger charitable gifts with some or all of that disposable income. So that’s a bit of good news, in my opinion. The charitable income tax deduction, as Roberts says, remains intact. And I want to share a brief story here because there is some confusion about this issue.
And the confusion revolves around all the press about the doubling of the standard deduction and how that could turn some donors from itemizers who got a tax benefit, income tax benefit for their charitable gift, into donors who now take the standard deduction. So they lose the benefit of that charitable income tax deduction. The story is that I was talking with a donor out west earlier this year, and I asked him, how are you feeling about the new tax act? And how is it going to affect you personally and professionally? And we had a very good conversation. He was very open and wanted to talk about that.
And we got to a point in the conversation and Joe said, you know, Greg, the one disappointment I have is that the charitable income tax deduction has been eliminated. And I kind of smiled when I said, now, this is a donor who makes six figure charitable gifts every year. He’s a very generous guy. And so I said, well, Joe, I’ve got some good news for you. The charitable income tax deduction remains intact. And you are going to continue to receive income tax benefits from your charitable gifts just like you always have.
Now, this was news to him. He was-- again, he’s not one of these annual donors or middle donors who make small charitable gifts. He’s going to continue to get the benefit. So there is confusion out there and there is a chance for us, as a representative of charitable organizations, to help educate our donors on these issues. The other bits of good news, and we’ll just move to the next slide here, if it will come up for me, as Robert said, capital gains tax rates have been left untouched. For high net worth donors, they continue to pay a hefty 23.8% on capital gains when they sell highly appreciated assets.
When they make a gift of those assets to charity, that 23.8% becomes zero. They pay nothing when they give that to charity, because charity is tax exempt. Robert also mentioned these last two points, and I’m not going to go over them again except to say, if the other bit of good news with this tax act is that, in my experience, it is presenting us with a golden opportunity to talk with our donors about how they feel about the Tax Act, how it may affect them, how it may affect their philanthropy going forward.
And we can oftentimes these conversations, you can even combine it with a conversation about what the donor feels is going on in the stock market, which has been all over the place this year. One of my colleagues out in California had this conversation about the tax act, about the stock market. And this donor ended up making a very large gift of appreciated stock. So the tax act gives us-- it’s very much on donors’ minds, particularly major gift and principle gift donors. And it gives us a very natural entree into talking about taxes and assets with our donors.
Let’s go to the next slide and we’ll talk about the one area of concern. And this is legitimate. But as Robert has told us, the standard deduction has doubled to $12,000 for individuals and $24,000 for married couples. And under the old law, there is no doubt we had about 30% of Americans itemized. Under the new law it’s estimated it’ll be about 10%. So there will be fewer donors who are itemizing. And again, this issue may affect giving of our annual fund level or middle donors. But it is not a major gifts issue. This is irrelevant when it comes to our major and principle gift donors.
So, what has happened with the doubling of this standard deduction is that we now have a segment of modest donors who may elect to simply take the standard deduction of-- and this affects, as Robert, said married couples far more than it affects single donors. Let’s use the case of a married couple. They are probably-- chances are, depending on what their other itemized deductions are, they are likely to now take the higher standard deduction of $24,000 as opposed to itemizing their deductions if say they have charitable gifts of $10,000 and mortgage interest of $3,000, and property taxes of $6,000.
Well, their itemized deductions add up in $19,000. They are no longer going to itemize. They’re going to claim the higher standard deduction. And what that means is that they’re no longer going to get tax benefits for their charitable gifts if they take the standard deduction. And so there are estimates from very reputable organizations that charitable giving could drop anywhere from 2% to 5% this year. And while these are reputable organizations, they’re just estimates. And I think we have to wait and see what happens.
You know, first, people give because they believe in the organization’s mission. And it’s not all driven by taxes. Taxes can be important, but it’s not the primary driver for many donors. There are lots of different factors that affect charitable giving, including the stock market. There’s a very high correlation between giving and the stock market. And so these other factors, I think, have a bigger impact on what kind of year we’re going to see in 2018, as opposed to the doubling of the standard deduction.
The other issue is that most revenue at many charity comes from major gifts. And these givers are not affected one iota by the doubling of the standard deduction. And then finally, in addressing this concern about the doubling of the standard deduction, there are strategies for these more modest donors affected by the doubling of the standard deduction to make their charitable gifts and get income tax benefits, even if they no longer itemize every year. And we’ll talk about some of those strategies in just a moment.
So let’s move to opportunities for not for profits. For most major donors, the tax benefits for giving appreciated assets, like stocks, have actually increased. And the reason for this is that many of the major gift donors are going to have higher effective combined federal and state capital gains tax. So if they sell an asset, your capital gains tax is actually going to be higher this year than it was last year. And that cost of [? selling ?] as opposed to giving, well, that makes charitable gifts of those appreciated assets even more compelling.
And the reason why the capital gains tax rates are going to be larger this year for many donors, many major donors, is donors in states with capital gains taxes, and that’s like 41 states, there are only United States that don’t have state capital gains tax, these donors used to be able to deduct those state capital gains taxes that they paid on their federal income tax form. But with the new SALT limit, the state and local taxes and property taxes limit that Robert talked about, with that new limit at $10,000, these donors won’t be able to deduct their state capital gains taxes because they’ve already exhausted that $10,000 limit on their income taxes and property taxes.
So they’re actually going to be paying more federal and state tax combined because they no longer get the benefit of that state capital gains tax deduction on their federal form. So that’s something that’s important to keep in mind. And of course, with this epic bull run of the last nine years, many donors own highly appreciated stock. And as I just explained for major donors, many of them, it’s even more compelling to use that highly appreciated stock this year as opposed to last year.
Let’s move to the next opportunity. And there has not been a lot of press on this. But this has the potential to affect charitable giving of real estate for a relatively narrow band of donors who own four to five homes. Under the old law, if someone owns, let’s say, four homes, and they had $200,000 total in property taxes that they paid on all those homes, they could deduct all of that $200,000 on their federal tax return. Now again, because of this SALT cap of $10,000, they are not going to be able to deduct a large share of that $200,000. They’re capped at $10,000 for not only property taxes, but it also includes other state and local taxes they have.
So that huge tax benefit went out the window for the donors who pay lots in property taxes. And many of these donors have large capital gains in these homes. And you know, they’re wealthy but it’s a hassle to own real estate. There are a lot of costs and upkeep and maintenance. And many donors that we work with are looking to simplify their lives. And now, not being able to deduct the property taxes, the substantial property taxes on many of their homes, that could be one more reason they decide to rid themselves of a home sooner as opposed to later. And so questions like, how will the new SALT cap of $10,000 on deducting property taxes and other state and local taxes affect you? Has it caused you to think differently about future plans for your homes?
Let’s move to the next opportunity. And that is, again, a lot of good news here in that companies have announced that they are actually increasing their charitable plans for this year. You know, that tax act cut corporate tax rates substantially. And so you have a lot of companies coming out and announcing to the world that, hey, we are going to step up our corporate philanthropy this year. And you see three companies on the screen that have done just that. And we, at the Nature Conservancy, we have a list of 50 companies, roughly 50 companies, who we have relationships with who have announced plans to increase their philanthropy.
And over the last couple of months, our corporate foundation relations staff have been out visiting with those companies. And even if we don’t know, even if we’ve got a relationship with a company and we don’t know that they’re necessarily going to increase their giving, it’s an opportunity to go visit with them and ask them about whether the new tax act is causing them to think differently about their philanthropy, and what, if any, changes are they making. So corporations and corporate foundations, big time opportunity this year with the tax cuts. Again, classic example of, they have more disposable income and many of them have said, hey, we’re going to give a lot or some of this disposable income to the charities we care for.
And then finally, we have strategies for middle donors. And again, these are donors like myself, someone who might give $10,000 cumulatively to charity every year. One of the strategies that is being used already is to bunch donations to a donor-advised fund every year. And what happens here is that donors with sufficient flexibility can pick a target year to itemize their deductions. And they can transfer several years of charitable gifts to a donor-advised fund, let’s say, this year. They make two years worth of gifts this year. And that takes their itemized deductions, along with their charitable deduction, along with mortgage interest, along with any property taxes, that takes it well above the $24,000.
And so they get the full tax benefit of that gift to the donor-advised fund. And then next year they will not make additions to their donor-advised fund. They won’t make new gifts next year. But the beauty of the donor-advised fund is that next year they are going to continue to give from that fund to their favorite charity because they just front loaded the gifts to the donor-advised fund. And in this way, there’s no charitable deductions that are wasted during the off years when the donor is taking the standard deduction.
And then finally, I want to mention-- and Robert spoke about this-- for those donors over 70 and 1/2, making charitable IRA rollover gifts is a great strategy to get tax benefits without needing to itemize, because the custodian of the IRA moves that money directly to the charity. And the donor is getting a tax benefit from that. They don’t need to itemize to get the tax benefit. So with that, I want to hand it over to my friend and colleague, Sheryl Aikman at the Community Foundation of Western North Carolina, who’s going to speak to us on what we as not for profits should actually be doing in response to the new tax law. Sheryl.
SHERYL AIKMAN: Thanks, Greg. Let me just take a moment here and let everyone know that we are going to try to address questions that you all submit via the webinar interface. And those are being curated. And we’ll have some time for Q&A. So if you do have a question, please submit it, and we’ll do our best to get to it as we wind up the webinar in just a few minutes. So I’m going to take apart a little bit something that Greg mentioned. And that is, why people give and what their motivations are.
So only 30% of US taxpayers itemized before 2018, which is clearly not a majority of tax payers. And a much larger percentage of people give gifts and make gifts to our organizations. From the 2016 US trust study of high net worth philanthropy, which the Indiana University Lilly Family School of Philanthropy does with US Trust, they looked at factors driving charitable giving among wealthy households. Now, this is wealthy households, but I think motivation probably spans beyond the demographics that they survey. And people’s motivations for giving were stated in these ways. Believing in the mission of the organization, believing that their gift can make a difference, experiencing personal satisfaction or fulfillment, because they support the same causes annually.
And no doubt, that ties back to their belief in mission. Because they want to give back to the community. And because it is a part of their religious beliefs. So this is a moment for us, as charitable organizations, to remember that, while we provide tax benefits, by the way, we’re organized for many donors, we also provide much more important impact for the people and causes we serve and for the people who support our organizations with gifts by providing a return that isn’t related to the bottom line of their tax return or the bottom line of their finances.
What can we be doing now? So 65% of you in the poll we pushed out at the beginning of the webinar said that you’ve received a question, many questions, or at least a few questions about tax reform and giving. And the rest of you expect to receive one and are getting yourselves informed because of that. And that is exactly what we need to be doing. We know you’re going to have good information to share with your colleagues and donors and prospects because you’re participating in this webinar. Here’s what I’ve been thinking about. Fundraising is based on relationships. And if your office is like mine, some donors have important relationships and a go to staff member outside the development office.
So I’ve thought carefully about who else in my organization may be responding to questions. Maybe there’s someone in your finance department who handles issues with pledge tracking. Or maybe your chief executive has donor relationships and will need a briefing on these key points. I want to reiterate the importance of whoever’s answering questions, or even just taking the questions, that they’re using words like, my understanding of how this may impact to you is, or, ending any communication, written, or verbal, or tweets, or e-mails, whatever you’re doing, with an urge to your constituents to check with their financial or tax advisor to make sure that the decisions they make are the best for their particular situation.
As you’ve no doubt gathered from all the great information that Robert and Greg shared, there is a lot of interplay among the impacts of this tax reform legislation with giving. And many people are probably going to not fully understand its impact on their financial picture until sometime next year, maybe until this time next year, after they’ve seen and filed their 2018 returns, or at least seen them and filed an extension for further review. So another operational issue you may want to consider is with regard to pledge accounting and recording, as well as gift accounting and recording.
Donors who use that bunching strategy that Greg mentioned, do you have a way to track and acknowledge them so that if they tell you, I’m making my gift now for the next two years, you have a way to acknowledge that and make clear that you understand their intent. Greg also mentioned donor-advised funds. And I’m going to talk a little bit more about that as well. But a good soft credit system to track gifts that come through donor-advised funds is critical. Those relationships need stewardship that is identical, or perhaps even enhanced, for the ways that you treat donors who give to you directly.
So making sure that you know how you’re reporting shows you those gifts and those donors and how you’re tracking moves management or other stewardship systems report them to you is really important. And this is the time to be looking at all that if you have any questions about being able to track those donors. And the other thing is-- and as Robert said-- this is the time to manage your organization’s leadership’s expectations. There will be changes in people’s giving patterns. And there may be somewhat of a downturn.
At the very least, your statistics are going to show some bumpiness as these changes work their way through our systems. But it’s also a time, as Greg said, to be positive and upbeat with donors. Is there an opportunity if you make thank you calls to reiterate that you’re aware of tax reform and that it may be changing things for your donors and ask how you can help. I just want to reiterate some of the opportunities I see. And all of these have been mentioned. Well, maybe one is a little bit different. But high net worth donors who were previously affected by limits on their giving, people using IRA assets for gifts, or for whom that may be a more attractive strategy, for folks who want to create or use a donor-advised fund.
But I also have been talking with donors and have had the occasion to talk with donors and advisors who have been, for years, giving based on a budget that is driven by tax considerations calculated by their tax advisor, and isn’t necessarily reflective of their charitable impulse and intent. So this may be an opportunity to pivot donors like that toward motivation that is more driven by charitable impact, by those factors that I cited on that first slide, their charitable motivation rather than tax motivation.
And it is all about communication with donors and reinforcing their impact on the causes and people that we serve. Fundraising is all about listening. That is at the core of what we’re called to do with donors and within our organizations, to listen to the needs that we’re called to address and then to communicate those needs to the supporters that we so value. So listening for some cues-- and I’ve got some things you may hear from your donors or some things that you may want to start a conversation about. If they’ve recently started taking income from an IRA, then they can probably-- they have to be 70 and 1/2, which doesn’t always perfectly coincide with the beginning of their IRA’s distributions, but they can probably start to make gifts using their RMD, which stands for required minimum distribution.
Those gifts do need a special acknowledgment letter, so you might also want to check on that in terms of your internal systems. If you have an age-related field in your database and can reasonably ascertain when people are coming up on their 70th birthday, that’s a great time to reach out to them to remind them or perhaps even be the first to tell them that they can use IRA assets for charitable giving. If your donor is concerned that the stock market has peaked, or is at the very least aware that they probably have appreciated assets in their portfolio, an outright gift, a donor-advised fund, or a life income gift can harvest those gains and avoid capital gains taxes.
In some cases, using a charitable gift annuity to create an income stream prior to the charitable gift allows the donor to make a much larger gift than they thought possible. And another point of communication that’s recently emerged is that charitable gift annuity rates have been increased. So if your institution offers charitable gift annuities, or can partner with a community foundation or another provider, you have another great talking point for reaching out to donors.
If your donors have started to simplify their financial life, then make sure that you’re offering ways to help them do that, bundling gifts, adjusting a pledge, maybe paying a pledge off early so that they can take advantage of that bunching of charitable gifts and the deduction that will come with it. I was also thinking, as Robert was talking, about how we could all be making it easier for donors to give gifts of even just a few shares of stock. I’ll use myself as an example.
I don’t have extensive stock holdings but I do have one in particular that’s appreciated greatly. And while I’m not in a position to give tens of thousands of dollars to my favorite causes, if an organization that I want to support had an easy way for me to transfer even just a few shares of stock, and I knew it would be efficient for them, then that’s a way for me, as a probable non-itemizer in years to come, to harvest that appreciation and still reap a tax benefit, the avoidance of capital gains taxes, from a gift of appreciated securities.
I’ve already mentioned this, but if your donor has established a donor-advised fund with your organization or perhaps with Schwab or Fidelity or Community Foundation, then we need, as nonprofits, to be ready to steward those donor-advised gifts in the same way that we steward direct gifts from our donors. I sit on both sides of this coin in a Community Foundation. We both hold donor-advised funds but also receive many gifts from other donor-advised funds across the country. And it can be a challenge, sometimes, to make sure you know where the gift has come from, to make sure it’s attributed correctly, and to make sure it’s tracked correctly inside our donor management systems so that we can thank those donors and analyze their giving patterns in the same way that we analyze those of others.
And lastly, has your donor mentioned making changes to their estate plan in the light of the increase in the estate tax limits, or these other changes? That’s a time to encourage bequests and beneficiary designations. Those are still the preferred way for many donors to plan for what could potentially be their largest gifts. I highly recommend Russell James research on wording and motivation around gifts like this. Social norming is important. Words really matter in the messaging around these kinds of gifts. And Russell James has done a great service to the field by his brain-proven, brain analysis research on this matter.
And I like to remind people that this way of giving, a bequest, a gift in their will, a beneficiary designation, doesn’t change anything about their lifestyle now except to increase their feeling of well-being and satisfaction with having made a decision to be part of something bigger than themselves. I hope that was helpful to everyone. I’d like to hand it back to Megan with the Chronicle of Philanthropy to help direct the audience questions that we’ve received to the speakers. You can continue to submit questions and we will answer as many as we can during the time remaining in the webinar. Megan.
MEGAN O’NEIL: Thanks so much, Sheryl. And again, audience members, please go ahead and post your questions. We’re going to try to move through a few of these here quickly. Robert Sharpe, I’m going to direct the first one to you since you do fundraising work at all sorts of different levels. This comes from Miriam, who works at a food bank. She said that her charity in this year, an effort at the mid gift level, so she’s saying gifts from about $1,000 to $5,000, she and her colleagues are already in touch with these mid-level givers via direct mail. But she wants to know how she and her colleagues can effectively communicate with these mid-level donors beyond direct mail.
Should she be calling them? Should she be e-mailing them? What would you recommend for sort of that mid-level donor communication?
ROBERT SHARPE: Well, I think that depends on a number of factors. Number one, whether you’re a local-based organization, or national or regional. Good way with local-based organizations is to try to have as many donor gatherings events as possible where you can combine videos about the motivation and some of the factors that Sheryl was talking about and get your message across. The other factor that’s important is age. I think it’s pretty clear that for people over 65, 70 years old, which is where a lot of the market is, studies like Russell James’s study and others, the brain science is showing, that baby boomers who are roughly 52 to 72, and people that are older, they’re going to be relying primarily on print communications for knowledge and learning for the rest of their lives because they were programmed that way as children to learn from reading in print.
Younger people, different story. The millennials, they tend to have spent their whole lives on screens. And so I think there’s an age-based dimension to the choice of communications that you use. But I would say, as Barlow Mann who works with me likes to say, what’s the best way to communicate with a donor? It’s the way they prefer to be communicated with. So to the extent possible, give people opportunities to give you preferences of how they’d like to be communicated with. But I think it’s a mixture of various things. But I would not, especially with the older people, don’t forget that the print and the mail, they may fulfill online but a lot of the thinking and decision making is going to be print driven for years to come for the older group especially.
MEGAN O’NEIL: Great. I’m going to direct this next one to Greg Sharkey. Greg, this is a question about donor-advised funds. This person is asking, if you’re seeing an increase in donor-advised fund giving or the creation of funds, especially for those who may want to bundle charitable gifts to get that deduction, and what do you sort of foresee on that front here in the next couple of years?
GREG SHARKEY: Yes. There was a huge increase in donor-advised funds in many of the largest hosts in December of 2017. And again, that was because folks were anticipating, or at one point in December they knew, that we had a new tax law. And they wanted to move quickly to kind of front load several years of charitable gifts into their donor advised fund. And so I think the new tax law has made donor advised funds, in a way, even more attractive particularly for middle donors who are more modest level donors, like myself. Who can now, because they have a donor-advised fund, they can use that bunching strategy and they can get the full benefit of their charitable gifts every other year or every few years, and then continue to make those gifts from the DAF, even in years where they’re not making new gifts to the donor-advised fund.
I expect-- I know that I’ve got some friends at Fidelity, which is the largest donor-advised fund in the world. They had an absolutely huge record breaking December for newly created donor-advised funds. And you also had a lot of those with donor-advised funds adding substantially to those new funds in light of the new tax law. I expect donor-advised fund growth has been just off the charts for the last nine, 10 years. And I expect that to continue under the new tax law.
MEGAN O’NEIL: Thank you so much for that. Sheryl, I’m going to direct this one to you. This comes from somebody in the audience who’s concerned about fundraising among younger donors. You know, there’s so much focus on people over 65 being the biggest source of charitable giving in the US, which is true. But this person wants to know how to go about attracting some of those younger donors when we know, for the most part, most of them probably won’t be itemizing. What should be the strategy there in terms of communicating mission and value to folks who we know will no longer be itemizing and scoring that charitable deduction?
SHERYL AIKMAN: Well, that’s another whole webinar. And I’m not a communications expert. But I think the sort of-- going back to first principles that we-- our mission is what motivates donations, that exactly what Robert said, you know, you have to talk to people in the way that they want to be talked to or message, whether that is younger donors are probably more likely to be engaged with you on electronic channels as opposed to print, which in some ways is great. It’s a lot cheaper. Our communications budget has decreased year over year because we’ve moved more and more online and are reaching more people in that way.
So I think looking at that as an opportunity. I depend on a couple great resources in the field to continually check my communications and to learn more about the best ways to message. Tom Ahearn is one of those-- is an amazing, amazing communications guru to the field. And there are many other resources that can help you write better, communicate better, and be more creative. I also think if you have ways to engage volunteers in the work of your organization, the demographic research all seems to point to the need for millennials and other younger donors to touch and feel the impact that their contributions make. And that is a way to garner both their human capital as well as their financial capital.
MEGAN O’NEIL: I have one more question here. I’m going to describe it as sort of a United Way donor question. Robert Sharpe, we have a lot of people who are worried here on the webinar about the donor who is maybe giving several hundred or a few thousand dollars a year who will no longer be itemizing and what charitable fundraisers need to think about that. Are people going to stop giving if they lose that charitable deduction? How real do you think that fear is, Robert?
ROBERT SHARPE: Well, this is an opportunity to, again, touch on the universal charitable deduction, which I would urge everyone to be talking to their congressman about, which would allow people to deduct a certain amount above the line, if you will, whether they itemize or not. Let’s get back. Let me give you a little bit more detail about who’s affected, who are the new non-itemizers? They are essentially people with household incomes roughly in the $55,000, $75,000, $80,000 to the 125! $125,000, $140,000 range is the estimate. Those people given an average of around $2,300 per year. The average United Way donor is often less than that level. A lot of that 30%-- a lot of the people, the 70% who are giving who are not itemizers, they tend to be the smaller donors, the payroll deductions, the $25 annual fund donor, the direct mail donor, the people that are, together, giving a lot of gifts, but in the aggregate it adds up to 30% of the money.
Now, the most popular solution to this that we’ve got right now, the one that seems to have the most traction, is a bill that would allow people to deduct 1/3 of their standard deduction in the form of charitable gifts above the line. So that would mean that people that would be allowed to deduct up to $4,000 a year above the line, whether they itemize or not. And for a married couple, that would be $8,000. That’s more than enough to not only plug the hole for people who are no longer itemizing, but to extend itemizing benefits to an awful lot of people who are not currently able to itemize.
And we’re getting pretty good support for that and some other legislation. But I would say that if you go back to economics 101, elasticity of demand. If movie tickets cost $5, a lot of people are going to go to movies. If they cost $100, there’s still going to be some people that are going to go see certain movies, but not very many. Now, the question is whether charitable giving, if the cost goes up a little bit because it’s not itemized anymore, or it takes more money to make the income, the question is, if people cut they’re giving by 20% from $1,000 to $800, are they going to cut every gift by 20%? Or are they going to cut some entirely and leave others alone?
So I think the level of donative intent and the motivation level, the more emotional, spiritual, deeply driven the motivation is versus an impulsive gift because something just looks like a good idea I think you have to focus on your most committed long term donors I would start recognizing your people that have given for the longest period of time and your largest cumulative donors because they’re the ones who’ve given the most over a long period of time.
So remember, it’s a left brain, right brain. Giving is motivated emotionally and then it’s rationalized. People decide whether they’re going to go for all kinds of reasons, recognition, gratitude, love, whatever. They decide how much and what they’re going to give more on a rational basis. So we really have to address both of these, I think. And the final analysis is make sure you’re emphasizing the real primary motivators. The who and the why, it’s mostly emotional, spiritual, psychological. The what, when, and how is more rational. And that’s where the taxes play.
It doesn’t cause a gift to be made but it can affect how much. And so what we have to do is recognize that and help people understand the ways that they can effectively deal with this.
MEGAN O’NEIL: Thanks so much. That’s going to do us for the day. We’re several minutes past the hour here. And I don’t want us to get cut off or kicked off here. So thank you so much for the wonderful questions. I’m available both on Twitter and via email. If you have more of them, happy to field and play air traffic control between the audience and some of our guests here if you have additional detailed questions. Again, today’s session, the webinar, will be available on demand. If you’d like to give it to a colleague or an underling or a boss, you will get an email from the Chronicle and you can watch this again, or share this with colleagues.
We would also invite you to join us for some additional webinars we have coming up. You can see those there on your screen. And we’re always looking for additional attendees. Hopefully you’ll find them useful. Just one last thank you, again, to the sponsors. Again, they are NACHA, or the Electronic Payments Association and Berdon Accountants and Advisors. They were the folks who made today’s webinar possible and we couldn’t have done it without them. Thank you all so much and have a great day.
