In the aftermath of the November 8th election, non-profit organizations have been asking themselves the following questions about President-elect Trump’s impact on charitable giving.
- How will President-elect Donald Trump’s income tax rate proposals affect charitable giving?
- What impact could Trump’s proposals to cap itemized deductions have on motivations for charitable giving?
- What impact might Trump’s spending and deregulation proposals have on our organization’s ability to secure philanthropic support?
Income Tax Rate Proposals
President-elect Trump has proposed substantial tax cuts for wealthy households. These tax cuts would reduce after-tax benefits from making charitable gifts. For example, it currently costs a person in the 39.6 percent tax bracket slightly less than $60 to make a $100 charitable gift ($100 minus the $39.60 in income tax savings). If the top rate were reduced to 33 percent, then the after-tax cost to make this $100 gift would increase to $67, and, therefore, could discourage charitable giving.
However, the above “tax-rate effect” could be offset in whole or in part by what economists call the “income effect.” Lower tax rates will leave people with more after-tax income to make charitable gifts. For example, in 2017 tax cuts for persons in the top 1 percent would average more than $200,000 in additional after-tax income, which could be used to make charitable gifts.
Which of these counterbalancing effects has the stronger pull will depend on how people respond to the “tax-rate effect” and “income effect.” Therefore, Trump’s impact on charitable giving is yet to be determined.
Itemized Deduction Proposals
Capping itemized deductions at $100,000 for single persons and $200,000 for joint filers could have a significant negative effect on charitable giving. IRS data from 2014 indicate that taxpayers with over $1 million in adjusted gross income deducted an average of $165,000 for charitable contributions and another $260,000 for state and local taxes. With a $100,000 overall cap on itemized deductions, state and local taxes alone would exceed the proposed cap. This would mean that high-income taxpayers would not receive any income tax benefit from giving to charitable organizations, and Trump’s impact on charitable giving could be negative.
In evaluating these proposals’ impact on charitable giving, we also need to ask, “How important are income tax considerations in a persons’ charitable giving decisions?” The U.S. Trust 2016 Survey of High Net Worth Philanthropy found that belief in the mission of the organization and confidence that their gifts can make a difference were the highest motivators for charitable giving. Receiving tax benefits was viewed as playing a role but not nearly as important as belief in mission and making an impact. Therefore, Trump’s impact on charitable giving may not be as dire as some predict.
Spending and Deregulation Proposals
President-elect Trump’s economic proposals also include ones that could impact charitable giving. If federal government spending (except for defense and social security) are reduced 1 percent a year, then this reduction could impact federal employees and those others whose jobs depend on federal dollars. The persons impacted would have less income from which to make charitable contributions.
On the other hand, reducing regulations could benefit the banking, pharmaceutical, and energy sectors and result in increased income for these workers and higher stock prices for investors.
During his campaign, President-elect Trump said he wanted “to build the next generations of roads, bridges, railways, tunnels, seaports, and airports.” If Congress agrees, then the increased federal spending would be expected to benefit companies and workers in the construction industry. For example, Caterpillar shares increased 8 percent on the day after the election.
Unknown factors that could affect Trump’s impact on charitable giving include whether interest rates and inflation stay low.
The forms in which the proposals described above will be put forward, gain approval from Congress, and are enacted into law remain to be seen. Non-profit organizations should make lawmakers aware of how proposed legislation would impact their abilities to deliver their programs. At the same time, the most important thing non-profits should do is to focus on strategies they can control, including the following.
- Listening. Take time to listen to your donors, including how these proposals may impact them, their financial positions, and their motivations for giving. Use the information learned to help shape your messaging and communication, especially about the impact your organization is having on people’s opportunities, health, and well-being.
- Pipeline. Regularly review your major gift pipeline to determine donors and prospects who may be impacted—unfavorably or favorably—by the proposals described above, including their financial abilities, solicitation amounts, and timing.
- Worthiness. Rethink how your organization can increase its “worthiness” in your donors’ and potential donors’ minds, in order to help mitigate adverse charitable giving impacts and leverage positive opportunities, from the above proposals. Then, use regular communication that focuses on your organization’s results and impact in order to enhance your worthiness.
Bentz Whaley Flessner can prepare your organization to develop and implement strategies to address Trump’s impact on charitable giving by working with you to minimize the downside and leverage the upside of proposals on income tax rates, caps on itemized deductions, government deregulation, and targeted government spending.
Originally published November 16, 2016
Copyright © 2016 Bentz Whaley Flessner & Associates