More donors, fewer dollars?
-By Bill Stanczykiewicz, Ed.D.
The new federal tax law might reduce charitable giving among a small group of donors while also introducing millions of new donors into the philanthropic landscape. While the nonprofit sector long has lamented the possibility of “dollars up, donors down,” the new reality just might be, “donors up, dollars down!”
That’s according to new research from the Indiana University Lilly Family School of Philanthropy, conducted with support from CCS Fundraising. The study’s analysis of the One Big Beautiful Bill (One3B) shows that annual charitable giving might decline by $5.7 billion in future years while more than 8 million new individuals start donating to their favorite nonprofits.
On The Fund Raising School’s “First Day” podcast, Jon Bergdoll – who serves as the interim director of data & research partnerships at the IU Lilly Family School of Philanthropy – said any decline in charitable giving likely would occur primarily from individuals who are in the top one percent of income earners in the United States. Bergdoll explained that reducing their cap on itemized donations from 37 percent down to 35 percent could result in a $6.1 billion decrease in charitable giving from the wealthiest Americans.
If this subset of charitable givers is not in your donor database, then this finding is a moot point for your nonprofit. However, the projected decline is important to note since these top income earners account for about one-third of all charitable donations from individuals.
Bergdoll emphasized, “At an individual level, it is very difficult to know how much any given household is going to give.” While some of the nation’s wealthiest donors might scale back their financial philanthropy, others might increase their charitable giving to meet tax-saving goals in their financial plans.
Bergdoll explained that individual donation behavior shifts gradually as awareness of new tax policies evolves. The Fund Raising School advises talking with each of your donors about this possible effect of the new federal tax law to learn how each household’s charitable giving might change, if at all.
Meanwhile, all nonprofits can adapt their annual fund strategies to emphasize the new Universal Charitable Deduction (UCD) of $1,000 for individuals and $2,000 for married households filing jointly – a new policy that, according to the study, could attract 8 million new donors.
Approximately 90 percent of U.S. tax filers claim the standard deduction and do not itemize, eliminating that tax advantage from their consideration, and possibly removing them from the donor rolls. With the new UCD, all taxpayers now can receive a tax deduction for their charitable giving, a powerful incentive that nonprofits need to communicate to prospective donors who could contribute up to $1,000 or $2,000, based on their filing status.
The study shows that the UCD could increase charitable giving by $4.39 billion per year. However, “(Donors) are not going to react to this incentive if they do not know the incentive exists,” Bergdoll said.
Therefore, the new UCD can be included in all of your annual fund communications. Nonprofits also need to ensure that proper gift recognition is provided so individuals can claim the UCD on their tax forms.
Meanwhile, the study also estimates that charitable giving from the business sector might decline by $1.55 billion annually. Private sector companies donate about one percent of their pre-tax profits to philanthropic organizations. However, under One3B, that first one percent no longer is tax deductible. Therefore, Bergdoll noted, the result could be reduced charitable giving from the business sector.
The Fund Raising School teaches that private sector companies donate for reasons associated with government, employee, and customer relations as well as for altruism around a particular cause (i.e. a food company interested in reducing food insecurity). Therefore, fundraisers need to ask their private sector funders if or how the new federal tax law will affect their charitable giving.
Taxes rarely are the top reason or only reason why people and companies donate, but taxes still are a reason. Proactive engagement with donors and corporate funders is more important than ever before. Tax policy might reshape conditions for charitable giving, but the future of philanthropy will be defined by how well fundraisers communicate and how donors choose to respond.
Continue your professional development at The Fund Raising School through more than two dozen courses leading to five certificates, taught in-person and online. You also can stay informed through the “First Day” podcast from The Fund Raising School.
Bill Stanczykiewicz, Ed.D., serves as director and Rosso Fellow of The Fund Raising School within the Indiana University Lilly Family School of Philanthropy, where he also serves as senior assistant dean for external relations.