As the executive of a nonprofit, Maureen Murphy worries about the impact of the new 2017 tax law.
"The changes make me lie awake at night. Like all [nonprofits] out there, I am turning rocks over to find funding sources," said Murphy, head of development for VNA Philadelphia, which provides hospice and palliative care for patients at the end of life, as well as home care.
Murphy's latest concern: Just 16 million Americans are expected to itemize their taxes in 2018, down from 37 million Americans before. Will that induce people to be stingier to charities and nonprofits?
"The challenge is that we don't have any historical data to show what the answer might be," said Murphy on her rounds with patients, many of whom can't afford to pay for end-of-life care. "This whole year will be a wait-and-watch for us."
VNA Philadelphia is just one of thousands of Greater Philadelphia nonprofits whose fund-raisers are wondering the same thing. The city ranks near the top in the United States for nonprofits, largely because Philly is chock full of "eds and meds," or nonprofit universities and hospitals, as well as grassroots groups that rely on donations from individuals.
But hospitals and colleges have one massive advantage: They sell for-profit services such as health care and education to boost revenue. Smaller nonprofits rely on single donors and corporate sponsors.
So what is likely to happen to donations?
First, the estimates: The Tax Cuts and Jobs Act will discourage charitable giving, the bipartisan Tax Policy Center predicts. By lowering individual income tax rates, the law will reduce the value of all tax deductions. Its increase in the standard deduction to $12,000 for singles and $24,000 for couples should significantly reduce the number of itemizers.
The Tax Policy Center expects giving nationally to drop by as much as $20 billion, or 6.5 percent in total.
"It will definitely affect charitable giving – we'll see less of the $10 and $25 donations people might give, the hundred or even thousand-dollar donations which now won't accumulate up to enough to deduct as in past years," said Denise McKnight, partner at Friedman LLP in Center City.
"It's scary. Some charities may end up merging, as they did during the 2008 recession. Probably the religious nonprofits like churches and synagogues will see smaller contributions, as well as the arts, which many consider to be a luxury."
Other experts contend that nonprofits' worries may be overstated.
"What research shows is tax considerations are one factor in giving – not the largest factor. The driving factors are attachment or personal connection to a cause, or a good clear request," said Peter Frumkin, University of Pennsylvania professor of social policy and practice. "Besides, many nonprofits don't depend on donations the same way they did 20 years ago."
Still, gifts to charity were that much sweeter because of the tax deduction. For some in the high-net-worth crowd, even that is going away. The tax law also doubled the estate tax exemption to more than $11 million a person. So very few wealthy people will deduct charitable bequests, either.
Marty Schenkman, a lawyer and CPA, presented to the Michael J. Fox Foundation last month on the new law, estimating that the doubling of the standard deduction to $24,000 (married, filing jointly) will cut charitable giving by $13 billion a year, while the doubling of the estate tax exemption to more than $11 million will lower charitable giving by $4 billion more a year.
Tips for charitable giving in 2018 and beyond
Donor-Advised Funds used to be the province of One Percenters, but they're now a solidly middle-class way to give to charity. This fund lets you take the full charitable deduction in the year it's set up, while enabling you to direct that money to charitable groups later on.You can set up donor-advised funds through a broker such as Fidelity, Vanguard, Charles Schwab, or a local outfit such as the Triskeles Foundation in Exton or National Philanthropic Trust in Jenkintown.
"We've seen a meaningful uptick in people establishing DAFs with us at end 2017," said Triskeles Foundation executive director Clemens Pietzner. At Triskeles, you can start with a $5,000 initial gift ($1,000 if you're under 18 years of age). There is no required annual payout, no start-up costs, and tax deductions of up to 60 percent (on contributions of cash).
At Vanguard, new DAF accounts doubled in 2017 to 3,200 from 1,600 the prior year, while donating over $873 million in 2017, up 28 percent from 2016. In 2017, donors contributed more than $1.57 billion to their DAF accounts, compared with $1.36 billion in 2016. In December, more than 80 percent of contributions into Vanguard's donor-advised funds came from non-cash assets such as securities, restricted stock, and real estate.
Among the many benefits: Your contribution grows tax-free; you can donate appreciated long-term securities and get a fair-market value deduction; you only need one charitable acknowledgement letter, instead of running around to get multiple letters for tax time; there is no IRS requirement to distribute the funds, no federal tax return or other state charity filings required as long as the organization to which you contribute is a legitimate 501(c)(3) charity, and you receive no personal benefit such as fund-raiser meals, show tickets, thank you gifts in exchange.
A maven of donor-advised funds is Eileen Heisman at the National Philanthropic Trust in Jenkintown. At their outfit, the number of DAF accounts rose to 6,430 in 2017, 25 percent above the prior year.
"We're even accepting bitcoin now" in donor-advised funds, she said. In 2017, National Philanthropic Trust converted $10 million to $12 million in bitcoin crypto-currency, and "then we created a mechanism to liquidate it. DAFs could make that into cash for the donor. We're unlocking assets that need to be unlocked."
Other illiquid assets you can monetize through a donor-advised fund? Family-owned business stock or illiquid shares in a private company; private equity; hedge funds; partnerships, and even fine art and jewelry. Make sure to ask what the custodian accepts: Fidelity DAF accounts, for example, will take cryptocurrencies such as bitcoin ($69 million last year, up from zero two years prior) but not art; JPMorgan also accepts cryptocurrencies.
"We just had our first piece of art donated; a Picasso sold at Sotheby's for $19 million. Now, that donor has that money and can spread it around," Heisman said.
RMDs from Your IRA
There's still an old-fashioned way to donate to your fave charity: Your individual retirement account, or IRA, remains one of the best charitable giving tools under the new law. It completely avoids the standard deduction and offers you as the donor full dollar-for-dollar benefit.
For federal tax purposes, distributions up to $100,000 from an IRA can be made directly to charity and are excluded from your gross income. The deduction is available in the year in which the taxpayer or IRA plan holder turns 70½ — but only after attaining that age. These are called qualified charitable distributions.
Taxpayers can direct the IRA from which they are taking required minimum distribution (RMD) to pay a portion or all of that amount directly to charity. The funds cannot be distributed to the plan holder and then donated.
Leslie Bohner, chief fiduciary officer and general counsel at Pennsylvania Trust in Radnor, also recommends the RMD route for charitable donations, as well as for donations of appreciated stock.
For her high-net-worth donor clients and nonprofit clients, "it's wait and see under the new tax law. The market's been crazy, and many are just now paying their 2017 taxes. About a third of Americans won't itemize anymore, so we're going to see some kind of drop in giving. How big, we don't yet know."
Find out more on taxes on March 8 at the Inquirer's Tax Reform Event. Register: www.philly.com/taxtalk.