Year-End Giving. It’s different this year.
If you’re like most of us, you give because you care about the health of children, about a clean environment, or great arts programming, because a neighbor asked you, because quality education is important. You give because you care about the quality of life in our community, and in the world.
But a little financial incentive certainly doesn’t hurt.
Unfortunately, for approximately 95 percent of Americans, the value of the charitable giving tax deduction is going to disappear under tax reform, if it passes in its current state.
This is not to comment on the overall merits or demerits of tax reform. This is to say that the tax incentives for giving – on which we have all relied for longer than we can remember – are going away.
And it’s to say that it might be a good idea for you to go ahead and make charitable gifts now — before January 1, 2018 — so you can take the deduction in the 2017 tax year.
To be clear, the deduction itself isn’t being eliminated. Rather, by doubling the standard deduction, the proposed tax plan will mean that the vast majority of taxpayers will no longer itemize. Since itemizing is how we take advantage of the charitable giving tax deduction, most taxpayers won’t be able to deduct gifts from their taxable income.
Let me repeat: We know that a tax deduction is not the primary reason that people give to charity. Study after study has shown that people give because they want to make an impact and because it brings them joy.
But the ability to take a tax deduction can affect how much people give to charity, according to preliminary research on the potential impact of tax reform. As one donor told us at the Delaware Community Foundation, “I will still give. I just might not give as much.”
That’s not because people are less generous or caring. It’s simply math.
Say you’re on a tight budget, but you figure out that you can afford to give $75 to your favorite charity. Then, you know you’ll qualify for a tax deduction, so you can really afford to make a $100 gift because you’ll get $25 back at tax time.
Under the pending tax reform, when you no longer itemize, you won’t be able to deduct that gift. So now, that $100 gift is really going to cost you the full $100. If your budget only accommodates $75, you end up giving $75 instead.
Who loses? Your favorite charity and, most importantly, those it serves. This worries us.
The undisputed estimates are that tax reform will result in a drop in charitable giving amounting to between $12 billion and $20 billion per year.
But many taxpayers have the opportunity to maximize the charitable giving tax deduction between now and December 31. While everyone should consult with a financial adviser before making major decisions, there are a couple of tactics that will be advantageous for many people.
First, consider making some of next year’s charitable gifts right now. If you typically give to certain organizations each year, you (and the recipient) may benefit by accelerating those donations to the 2017 tax year.
Second, talk to your adviser about whether a donor advised fund or similar vehicle might be right for you. With a donor advised fund, donors make a gift into a fund (like an account) at the local community foundation, take the tax deduction immediately, and then can decide later what nonprofits to support and when, with the added benefit of community knowledge and philanthropic expertise from the foundation team.
Generosity is a constant in our society. We are confident that next year and after that, Delawareans will continue to support things that matter to our communities. At the same time, tax policy matters.
During this season of giving — and last-minute tax planning — we encourage you to talk to your adviser about how you can maximize the existing charitable giving tax deduction and, as a result, maximize your impact in the First State.