Year-End Giving: How to Maximize Donations with the New Taxpayer Mindset

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If tax benefits are the main driver for donations to your organization, you likely have a mission problem. That said, tax benefits can motivate or alter giving strategies for donors, and the new tax law will impact returns for the first time in 2018. It is imperative you are proactive in the changing philanthropy landscape.

What Donors Are Thinking This Year

According to the Tax Policy Center, the increase in the standard deduction ($12,000 for single filers and $24,000 for joint filers) and the state and local tax (SALT) deduction cap ($10,000), may reduce the number of filers who itemize deductions by as many as 26 million people. Will less itemizers mean less donors?

Organizations will likely see a change in when and how much donors give. Here’s my view on what your donors may do based on their capacity to give:

  • Lead Donors
    The increase in the standard deduction will not impact this group and they will continue to itemize. However, the deduction they will see in their tax bracket rate will actually leave more money in their pockets. This increase in wealth could be a motivator for a transformational gift to your organization. It’s vital to have transparent conversations with these donors about the impact of the new laws and where your organization stands within their favorite charities.
  • Annual Donors
    Lower-end annual donors will continue to give at previous levels. Typically, gifts less than $1,000 aren’t given with tax implications in mind, so it’s unlikely these donors will use those gifts to convert their tax deduction from standard to itemized.
  • Major Donors
    You will likely see the biggest impact coming from this group. Where in previous years a gift of $1,000 or more may have allowed them to itemize charitable gifts on their return, now their gifts may not get them above the increased standard deduction threshold. Without your interaction, some may be discouraged to give. Others will use new strategies like Donor Advised Funds to accomplish their goals.

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“Stack” Giving and DAFs
As financial advisors attempt to maximize tax efficiency for their clients, they are encouraging “stacking” or “bundling” several years’ worth of annual gifts into one year in order to itemize. For example, a donor who usually gives $5,000 a year could give $10,000 in 2018, and $0 in 2019, taking the itemized deduction in one year and the standard deduction in another. If you are not familiar with this strategy, search “charitable gift stacking” online to learn more.

Financial advisors are also suggesting their clients take advantage of Donor Advised Funds (DAFs), which can be started with as little as $5,000. The donor takes the tax deduction in the year they donate to the DAF, and can make charitable contributions to non-profits immediately or any following year. DAFs were so hot in 2017, it could leave 2018 donations cold. According to the National Philanthropic Trust, the number of individual DAFs rose 60 percent in 2017 to 463,622.

DAFs allow donors the flexibility to contribute wherever and whenever they like. The gift technically comes from the DAF to your institution, not directly from the individual. Donors, however, see no difference, so stewardship and proper internal management of DAF contributions is key.

Five Steps Nonprofits Can Take
You must be prepared for stacking and DAFs in how you engage donors when and if they don’t make a gift every year and in how you set goals going forward (think average gift, donor retention, goal setting, major gifts strategy).

Here are steps you can take right now:

  1. Educate Yourself – Know what the tax laws mean for your donors and know how to discuss them. Use the change in law as an opportunity to reach out. If they are even partially driven by tax incentives to give, having a healthy knowledge of these strategies will allow you to more adequately address your donors’ needs.
  2. Educate Donors – Contact the top and middle of the giving pyramid about the impact these laws could have on your organization. Tell donors you want to make sure you’re stewarding them correctly, even if their gifts are only going to come every other year. The same rule applies for donors that have set up DAFs. Thank them for having the foresight to make a lasting impact, and make sure you’re prepared to properly steward and administrate their DAF grants.
  3. Be Creative – Consider a customized multi-year pledge schedule. Arm your development officers with knowledge and tools so you can make your donors feel valued and respected. More importantly, know that unless you’re having the conversation with your donor, they’ll likely make changes at the urging of their financial advisor.
  4. Be Flexible – Keep an eye out for mid-to-high level annual gifts that double this year. Think ahead and understand that the bump you may see in 2018 could be a sign that you’ll see less in 2019. Don’t panic, but some donors may not have the capacity to double their gift in 2018, and will be flipping the years for stacking ($0 in 2018, double in 2019).
  5. Stay in Touch — Steady, tried-and-true fundraising, including effective print, social and in-person communications, will keep donors engaged. They did not stop caring about your organization’s mission when the tax laws changed, so continue to thank them for investing in your organization.

Jake Muszynski
Senior Consultant

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