Written by David Heinen, Vice President for Public Policy and Advocacy
Last updated 11/20/2019
Like many American households, my family keeps a file folder with the various documents we’ll need to file our taxes each spring. Like many American households, every time we donate to a nonprofit, we keep a copy of the donor acknowledgment letter in our tax folder. And like two-thirds of those who nodded in agreement to the previous two sentences, I never even looked at those donor acknowledgment letters when I prepared our 2018 taxes.
By now, most of us working in the nonprofit sector fully understand the cause of this phenomenon: The Tax Cuts and Jobs Act (TCJA) that was signed into law in December 2017 significantly increased the standard deduction. This means that, starting in 2018, far fewer taxpayers used itemized deductions – which includes the charitable deduction – on their federal taxes. Translation: Most Americans no longer get a tax break when they donate to nonprofits. Further translation: For many of us, it was more expensive to make a charitable contribution in 2018 (and in 2019 and the foreseeable future) than it had been previously.
How much have the federal tax changes reduced charitable giving?
First, the scary (but misleading) data point: Tax-deductible charitable contributions dropped by $57 billion dollars last year! In 2017, 33.6 million American taxpayers (about 30% of all households) used the charitable deduction, making a total of $160 billion in contributions. In 2018, only 12.2 million Americans used the charitable deduction, and they only gave $103 billion dollars. Of course, it would be disingenuous to suggest that actual giving dropped by nearly that much, since most of the 21.4 million donors who started using the standard deduction didn’t’ stop making charitable contributions altogether.
More realistic data suggests that individual giving declined a bit in 2018...and that it will likely drop even more this year. Here are a few relevant data points:
- According to Giving USA’s annual survey, overall giving was down by 1.1% last year – a reduction of 3.4% when adjusted for inflation.
- Giving USA also found that individual donations of $250 or less were down by 4.4% in 2018.
- In informal polling at the Center’s nonprofit town halls earlier this year, 22% of nonprofits said that individual giving to their organizations declined in 2018.
The most common response the Center heard was: “Our donors aren’t going to figure this out until 2019!” Now that donors have the experience of not using their receipts from nonprofits when filing their 2018 taxes, many people will adjust their giving accordingly. That’s why 30% of nonprofits told the Center that they expect to see a drop in individual giving in 2019.
Early data suggests this expectation seems to be accurate. In its mid-year 2019 survey, the Association of Fundraising Professionals’ Fundraising Effectiveness Project found that nonprofits raised 7.3% less from individuals in the first half of 2019 than in 2018 and that the overall number of donors declined by 5.8%.
More bad news is on the way
The decline in giving to charitable nonprofits could be more precipitous in 2020, as charitable nonprofits will have new – and compelling – competition for donors’ dollars. As you may have heard, 2020 is a big election year with hotly-contested and expensive races throughout the ballot. Candidates, political parties, and PACs will be making daily (or perhaps hourly, based on what I see in my inbox) appeals for “urgent” donations. This year, political donations pose a greater threat to the bottom line of 501(c)(3) nonprofits since, for most taxpayers, charitable contributions no longer get preferential tax treatment to political donations. The bottom line: Over the next year, some of donors’ dollars will be diverted from charitable contributions to political donations.
What can your nonprofit do to buck these trends?
Here are a few tips to help your nonprofit maintain your individual donations despite the changes in tax laws:
- Don’t finish in 10th place in the fundraising game! Realistically, many donors who have switched from itemized deductions to the standard deduction aren’t going to stop giving altogether. And most won’t simply reduce their contributions to every organization by a fixed percentage. Instead, most donors will probably continue to give generously to the nonprofits that mean the most to them. Those are probably the organizations with which they have a personal connection, like their alma mater, their house of worship, places they volunteer, and nonprofits that have provided direct services to someone close to them. If your donors give to 10 organizations a year, make sure your organization stands out as an important one so that you aren’t the 10th nonprofit on their list (i.e. the one that they’re most likely to stop supporting).
- Remember that donations can happen 365 days of the year (actually 366 days in 2020!). As tax reduction becomes less of a motivating factor for donors, year-end giving campaigns may be less important than in the past. Consider tying your donor appeals to events that are relevant to your nonprofit rather than to the end of the calendar year.
- Know your donors. Some tax-savvy donors may have figured out that it might still be advantageous to itemize their taxes in some years if they double up their donations in some years and make little or no charitable contributions in other years. Others are looking to give through donor-advised funds rather than making direct contributions every year. Understand your donors’ giving strategies so you can work with them so their contributions work best for both your nonprofit and their tax planning.
- Refresh your fundraising approach. The tax law changes didn’t eliminate everyone’s incentives for charitable giving. About 10% of the wealthiest Americans are still itemizing their taxes (and taking the charitable deduction). Businesses that file taxes as corporations received tax cuts under TCJA and may actually be giving more than they had in the past. And individuals aged 70½ and older can still make tax-free distributions to nonprofits from their IRAs – and starting this year, they no longer need to pay state taxes on these contributions.
What is the best option for offsetting this trend?
Tax policy is at the root of the drop in middle-class giving. Tax policy can also provide a solution. Several bills in Congress would create a universal, non-itemizer charitable contribution. This could offset the negative trends in charitable giving and also incentivize all Americans to give more generously to nonprofits. Notably, Congressman Mark Walker (R-NC) introduced the Universal Charitable Giving Act in 2017 and is likely to re-introduce it in the coming weeks.
Realistically, it is unlikely that Congress will pass major tax legislation in the near future, so the Center is also pushing for two other types of policy solutions to increase charitable giving:
- A new state tax credit or deduction for charitable contributions by non-itemizers; and
- A temporary, targeted non-itemizer deduction for contributions to support nonprofits’ disaster relief and recovery efforts.
While it’s almost impossible to find a member of Congress or the state legislature who thinks increasing charitable giving would be a bad policy, we continue to hear three concerns about the concept of new tax incentives for charitable giving:
- A new universal deduction for charitable contributions would reduce government revenue. How nonprofits can respond: A universal charitable deduction or credit would significantly increase investment in essential services to communities through the work of nonprofits.
- The trend in federal and state taxes is to eliminate tax credits and deductions. How nonprofits can respond: Unlike most tax expenditures, incentives for charitable giving are designed to benefit communities rather than to reduce taxes for businesses or individuals.
- Many policymakers want to see data on the impact of TCJA on charitable giving before considering a solution like a universal charitable deduction. How nonprofits can respond: Early data show that the higher standard deduction has indeed meant less giving by middle-class Americans. Nonprofits can tell the story about the impact on their organizations and how this translates to fewer services for communities.
The bottom line
Because of the structural tax changes from the Tax Cuts and Jobs Act, middle-class Americans are giving less to support the work of nonprofits. Now is the time for the nonprofit sector to come together to advocate for tax policy solutions – like a universal charitable deduction or credit – that would offset this trend and encourage all Americans to give generously to support the work of nonprofits serving their communities.