Curbs in tax deductions may strain nonprofits

We are a philanthropic nation. Even with the challenges of recent economic times, charitable giving increased by $8 billion in 2011, an increase of almost 4 percent from 2010, according to the 2012 report by the Center on Philanthropy at Indiana University. Individuals gave $217 billion, compared with $209 billion in 2010.
People give to nonprofits and tax-exempt organizations because they care about the charity and its mission but there is also a tax motivation: for instance, your $100 donation might only cost you $72 or $67 after taxes. Tax deductions are certainly extra motivators; that’s why 30 percent of all annual giving happens in December.
Effective for your 2013 tax return, itemized dedications will be reduced by 2 percent for every $2,500 of income above certain thresholds.
This applies to several areas of deductions but is expected to have a proportionally large influence on the nonprofit community. Why? Because individuals consider charitable donations discretionary while other currently deductible expenditures, such as the deduction for state and local taxes, are not.
There are many reasons why high-net-worth individuals make donations. The 2012 Bank of America Study of High-Net-Worth Philanthropy issued in November 2012 surveyed 700 high-net-worth households from throughout the United States.
While 74 percent of this group state they are deeply committed and volunteer their time and energy, in addition to supporting a specific cause via financial contributions, 32 percent cited tax advantages as a significant motivator for giving.
Further reductions – as part of overall tax reform – are pending in the House Ways and Means Committee that could impact both charity-minded individuals (who itemize deductions) and the charities they sustain. Down the road, the changes could mean dramatic decreases in charitable donations and, in turn, significant reductions in funding and support for much-needed programs that span arts, education, health care and more. There are several proposals being considered. In February 2012, the president proposed limiting the marginal tax benefits for itemized deductions, including charitable donations, to 28 percent. This change would disproportionately affect higher-income donors and, as a result, the charities they favor. Another proposal caps donations that are deductible at a certain amount or percentage of income; yet another is similar to medical deductions that have a certain floor that must be reached before deductions in excess of that level are allowed. The latter plan might encourage individuals to “bunch” their charitable giving into a certain year to leverage the deductions, a strategy that may create extreme ebbs and flows in funding of nonprofit missions.
While we know that the 2 percent cut in itemized deductions will impact our tax situation, it is tough to say how we will feel in December. In a worst-case scenario, individuals might see that the loss of certain deductions changes their tax liabilities and, in turn, cut back their charitable course of action.
Alternatively, if the amount of allowable charitable donations is capped or a lower threshold for the marginal tax benefit of donations is established, high-net-worth or charity-minded individuals might decline to make large one-time gifts or decide to extend the payment of a pledge over many more years, rather than the more common three to five years.
The deadline for charitable and tax-exempt organizations to share information with the House Ways and Means Committee’s Charitable/Exempt Organization Tax Reform Working Group was April 15. It was hoped that giving our government decision-makers a look at some stories from stakeholders might influence how they formulate their proposals. Elimination of the charitable deduction or capping the effective tax rate for charitable donations could have dire consequences for nonprofit organizations. Brian A. Gallagher, president and CEO of United Way Worldwide, stated in testimony before the House Ways and Committee on February 14 that “we have calculated that a mere 2.5 percent reduction in donations to United Way would result in 1.3 million fewer times that we can provide job-training services for an unemployed worker, home care of an elderly person, or service supporting housing for a single parent.”
Savvy organizations might now look to build affinity with their donor base by getting supporters more involved in an effort to encourage donations based on an affinity to the organization’s mission. A nonprofit organization might want to survey its donor base now to find out what motivates them to donate and strive to increase donor affinity to the mission and cause so that it far outweighs the tax motivation.
The House Ways and Means Committee’s tax-working groups are expected to release findings in the coming months, including proposed changes in deductions for charitable giving.
Charitable donations are an important revenue stream for nonprofit organizations, providing essential services to address domestic and global problems. High-net-worth households have greater confidence that nonprofit organizations will enact positive change, as evidenced by their willingness to donate. Protecting the tax deductibility of charitable donations is essential in assisting nonprofit organizations to thrive. •

Martha Conn Hultzman, a principal at the CPA firm of LGCD, works closely with nonprofits. She can be reached at mhultzman@LGCD.com.