Insights for Non-Profits

The Tax Cuts and Jobs Act has had sweeping impacts for many US entities, and the not-for-profit sector is no exception. Tax reform doubled the standard deduction for individuals and married couples filing jointly. Consequently, fewer people will choose to itemize deductions, opting for the higher standard deduction instead. Although the deductibility of charitable donations is preserved, ultimately the tax incentives to give are reduced as donors can only deduct charitable gifts if itemized. Non-profits are left trying to gauge the impact on giving.

According to Giving USA 2018: The Annual Report on Philanthropy for the Year 2017, US giving rose to an estimated $410 billion – the first time donations exceeded $400 billion in a calendar year. Giving also saw a 5.2% increase over the previous year. Will the new tax reform provisions help or hurt this progress?

Luckily, there are several giving strategies that can be appealing in light of the new tax law. You can pass these along to your donors to help their pocketbooks and your bottom line.

Qualified Charitable Distribution

Qualified Charitable Distributions (QCDs) are alive and well despite the changes resulting from the Tax Cuts and Jobs Act. In fact, QCDs may be more valuable than ever under the new tax law.

A QCD allows donors to give up to $100,000 of their Required Minimum Distribution (RMD) from their Investment Retirement Account (IRA) directly to a charity when donors are over age 70 1/2. The QCD satisfies both the donor’s charitable giving and their RMD for the year. While the donation is not tax-deductible, it decreases the donor’s Adjusted Gross Income (AGI) for the tax year the donation was made. This could also potentially lower the donor’s income tax bracket and may help them avoid certain penalties that come with a higher AGI. QCDs must be made to a 501(c)(3) charitable organization.

This option is appealing for donors who may not rely on their full RMDs to meet annual spending needs and are interested in making charitable donations.

Donating Highly Appreciated Stock

Donating highly appreciated stock can potentially provide donors with a current income tax deduction, and allows them to avoid paying the tax on the unrealized gain.

There are a few things for your organization to keep in mind so it can accept donated appreciated stock. First, your organization needs an investment account that can accept the “in-kind” stock donation. Second, your organization should have a policy outlining what to do with in-kind donations. Lastly, you want to provide those who donate appreciated stock with a thank you letter and the average price of the stock and date of receipt.

Grouping Donations

With the Tax Cuts and Jobs Act’s higher standard deduction, donors can benefit from grouping multi-year donations into a single tax year. This approach can help your donors exceed the higher standard deduction on the year of the donation, but they may not make donations in other years. Grouping donations can also be done in combination with donating appreciated stock.

Non-profits should consider developing recognition of “grouped” donations to make it easier for their donors. Community foundations, donor advised funds, and charitable trusts may benefit as donors can “group” donations in one year that pay out over several years. Donors can also deduct cash donations up to 60% of AGI (this will only impact those who itemize).

Donor-Advised Funds

In recent years, donor-advised funds have become the fastest-growing vehicle in philanthropy. Contributions to donor-advised funds grew at three times the rate of total charitable giving in 2016, according to the National Philanthropic Trust.

Donor-advised funds are donor-established philanthropic funds that are maintained, operated, and controlled by a sponsoring organization. A donor-advised fund allows donors to establish and fund the account by making irrevocable, tax-deductible contributions to the charitable sponsor.

There are many benefits to establishing a donor-advised fund. This vehicle allows donors to leave a legacy, as it allows them to think strategically about how they’d like to donate their funds throughout their lifetime. It’s also easy for donors to maintain record of giving without an administrative burden. Finally, donor-advised funds are helpful if donors choose to take the grouping approach we discussed earlier.

It has always been crucial to invest in donor relationships, and tax reform makes that even more important. With less financial incentive to give, it’s important to have strong donor relationships and to consistently communicate how their donations are working towards your mission.