This tax season put Americans face-to-face with the consequences of the new tax law, and many have been disappointed by smaller refunds and bigger tax bills.
Nonprofits were bracing for the impacts of the new tax law too, but it appears that dire predictions about the revamped tax code creating a $13 billion to $20 billion drop in donations didn’t materialize.
Overall, giving to charities actually increased in 2018, according to recent data.
‘This is the area that our organization was most concerned about because it might be signaling changes in giving from the people who no longer itemize.’ —Rick Cohen, spokesman for the National Council of Nonprofits
There was a 1.6% increase in donations — from $4.82 billion in 2017 to $4.9 billion in 2018 — among 4,598 nonprofits tracked by the Fundraising Effectiveness Project, a collaboration between the Association of Fundraising Professionals and the Urban Institute. Data collected by Blackbaud BLKB, +0.92% a software company whose clients include nonprofits and foundations, found a 1.5% increase in overall giving among 9,029 nonprofits.
That’s good news, given that many observers feared the Tax Cuts and Jobs Act would lead to a significant drop in charitable giving. Experts thought the decline would be fueled by the doubling of the standard deduction — the amount every taxpayer is allowed to subtract from their taxable income.
Charities worried that would give Americans less of an incentive to itemize their deductions to reduce their taxable income. In turn, people who had donated to charity as a way to get a tax deduction may be less likely to do so.
Big donors and big donations were up
However, the increase in giving isn’t all good news. Much of the uptick was concentrated among wealthier donors giving to wealthier institutions. Organizations with annual budgets exceeding $10 million saw a 2.3% increase in donations, while small nonprofits (with budgets under $1 million) had a 2.3% drop, Blackbaud found. Contributions of $1,000 or more increased by 2.6%, while contributions of less than $1,000 dropped by more than 4%, said Rick Cohen, spokesman for the National Council of Nonprofits.
“This is the area that our organization was most concerned about because it might be signaling changes in giving from the people who no longer itemize,” Cohen said. “Those larger gifts come from people who will still itemize; it’s the smaller gifts that smaller nonprofits rely on that saw a drop. And its those smaller organizations that can’t afford any further reductions in their funding.”
Another key point: the uptick in donations didn’t keep pace with inflation, which was 2.44%, Cohen noted.
Fewer middle-income donors
The trend of wealthier donors making bigger donations as fewer middle-income households give to charity has been happening for the past several years, long before the new tax law took effect. “The overall growth in household giving is camouflaging two different trends,” said Patrick Rooney, executive associate dean for academic programs at Indiana University’s Lilly Family School of Philanthropy.
Firstly, the number of median-income donors has declined over the last several years. Secondly, growth in giving at “the larger end” is reflected in the rise of donor-advised funds, larger gifts ($1 million or more) and mega-gifts ($10 million or more), he added.
Some see this as a sign of widening income inequality and America’s uneven recovery from the Great Recession. But it’s still too early to say whether the new tax law is exacerbating this trend, experts told MarketWatch.
Why charitable donations increased in 2018
What was behind the overall increase in 2018 charitable giving? Taxpayers may have been taking advantage of two strategies that some accountants advised when the new tax law passed: “bunching” donations and using donor-advised funds.
Bunching means combining several donations that would have been made over a several years into a lump sum in a single year, so the donor can exceed the standard deduction. That’s obviously a technique that’s only available to people who can afford it. It also means that nonprofits could see a drop-off in donations during years when donors aren’t “bunching.”
Donor-advised funds (DAFs) are accounts that taxpayers set up to hold charitable contributions. The donor can put money into the account and receive a tax deduction that year, then decide later which charities receive the money and when to disburse it. Critics say DAFs provide an immediate tax benefit for wealthier households, but that charities don’t necessarily get the money in a timely manner. Others have said those criticisms are overblown.
DonorsTrust, a nonprofit that provides DAFs for libertarian and conservative donors, did brisk business in 2018, said executive director Lawson Bader. “It was actually our biggest year ever,” Bader told MarketWatch.
DonorsTrust took in close to $200 million in donations into DAF accounts, a roughly 80% increase from the prior year. Meanwhile DonorsTrust gave out $146 million in grants to nonprofits. Some DonorsTrust clients used their DAFs to bunch contributions, he said. They contributed more in 2018 so they could take the itemized deduction, Lawson said. “They probably won’t do that again this year,” he added.
The full impact of the new tax law is still unfolding
Likewise, both Fidelity Charitable and Schwab Charitable saw growth in the use of donor-advised funds in 2018. Fidelity gave out a record $5.2 billion in grants — a 17% increase from 2017, said Amy Pirozzolo, head of donor engagement at Fidelity Charitable.
Both Schwab SCHW, -1.19% and Fidelity FNF, -0.03% said the increase in DAF contributions was probably related to donors bunching their contributions, which means next year could be a whole different story in terms of the tax law’s overall effect on charitable giving.
The new tax law’s full impact won’t be known for at least another year, because many Americans are just now realizing how the new tax code affects their household bottom line. “We still expect this year and next year to be the ones to watch,” Cohen said.
Shares of Blackbaud have been up 26% this year compared to a 13% increase for the Dow Jones Industrial Average DJIA, +0.42% and a 16% increase for the S&P 500 SPX, +0.16%
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