Arts Intranet

Americans for the Arts members can join our staff on a member-exclusive briefing call February 20, 2018 at 3 pm ET, where we will update you on the Charitable Giving implications of the 2018 Tax Cuts & Jobs Act and the proposal to defund the National Endowment for the Arts and other federal cultural agencies. We firmly believe that our member network is one of our strongest resources, so after our update, we’ll open the floor up to your questions, comments, recommendations, and lessons learned—we hope you’ll take advantage of each other’s expertise! Register now on ArtsU.

On January 1, the 2018 Tax Cuts & Jobs Act went into effect, a substantial change to the U.S. tax code which has the potential to negatively impact arts and culture nonprofit organizations in a variety of ways. One of the most significant impacts will come in changes related to the thresholds and amounts associated with the charitable tax deduction. This 100-year-old provision was designed to stimulate giving to charities and other organizations serving the public good by providing an opportunity to claim a deduction as a reduction in an individual’s tax burden.

While the repercussions of the federal tax code changes are still emerging, and corresponding shifts in state-by-state tax policy may impact your situation, the notes that follow are an introductory primer. If you have questions about state-level implications, we recommend you reach out to your state comptroller or state association of nonprofits.

So, what’s changing, and how (and who) will it impact? And, most importantly, what can artists, arts and cultural organizations, and the nexus organizations who support them, do about it?

What is happening?

Charitable contributions can only reduce your tax bill if you itemize your taxes. Taxpayers generally only itemize when the combined total of their anticipated deductions—including charitable gifts—add up to more than the standard deduction.

The new tax bill doubles the amount of the standard deduction to $12,000 for individuals and $24,000 for married couples. The effects of this change include reducing the number of filers who use incentives such as the charitable tax deduction, by some estimates, from 30% of all filers to 5%.

People who itemize (across all levels of income) are much more likely to donate than people who don’t, and also donate substantially more, on average. We won’t know the complete repercussions for years of people choosing not to itemize, but there is prevalent concern that many people, lacking the incentive of a reduced tax burden, will reduce their contributions or even choose not to donate.

Average total charitable giving by annual income (adapted from Table C-11 here)
	Itemizers	Non-Itemizers
Under $50,000	$1,700	$340
$50,000-$100,000	$2,700	$850
$100,000 and up	$6,700	$1,600

Data provided by Indiana University Lilly Family School of Philanthropy

In the short term, taxpayers who were used to getting a deduction for their charitable gifts may not realize their contributions will not reduce the burden of their 2018 taxes. These donors may be surprised when they fail to hit the itemized deduction threshold and receive no tax benefit for those gifts, and may reduce their charitable giving in subsequent years on the assumption they will not be able to itemize in the future, or may choose to group multiple donations into a single year (more on that below).

How may these changes impact donors?

• For those who have an annual income of $50,000 or less, the impact of these changes will be minimal—3 out of 4 were not itemizing in the old system, and so were not claiming any charitable deductions. IRS data indicates that these households give on average $1,800 to $2,500 per year to charities.
• Middle-class donors with annual income of $50,000-$100,000 will be particularly impacted, as they are the most likely to shift from itemizing to taking the standard deduction. In the old tax code, approximately 50 percent of taxpayers in this category itemized. The shift in tax law may reduce charitable giving among this group by up to 6.9 percent, per the Lilly School of Philanthropy at Indiana University. IRS data indicates that these households give on average $3,000-$3,300 per year to charities.
• Other donors, in the highest tax brackets, will see their taxes go down and the cap on what they can claim in cash charitable tax deductions go up from 50 to 60 percent of their Adjusted Gross Income. This may lead them to feel they have more disposable income to contribute to nonprofits and charities, and more incentive to do so.
• Most corporations will also see a decrease in their tax burden. This may lead corporate donors to also increase giving because of a lower tax burden.

What can I do about these tax changes?

Should my organization include language about the tax bill in our fundraising appeals?

Probably not. Your case for support needs to be stronger than ever. Messages focused on the tax-deductibility of donations will not be as strong now. There are differences of opinion on this in the fundraising field, but we agree with the Association of Fundraising Professionals, which says: “It’s important to keep an optimistic tone and perspective moving forward. While many charities may focus on the difficult challenges ahead, it’s important that they balance that sense with optimism about how they’re still making a difference and changing the world. Donors need to know about the obstacles charities face, and organizations should be realistic about their situations and the needs of communities. But donors don’t want to be overwhelmed all the time with negative images. People will always want to help, and charities need to inspire them to action more than ever.”

Our donor brochures indicate the tax-deductible amount of donations at each donor level. Do we need to change it or eliminate this language?

No! Donations are still deductible, there will just be fewer donors who can take advantage of the deduction on their tax returns.

Our donors tell us their donations aren’t dependent on the tax deduction. Does that mean we’re safe from the impact of this change?

Most donors will tell you that their giving isn’t dependent on the deduction, and won’t change. For some, this will be true. Many arts donors are motivated by donor benefits like donor lounges, member preview events or exclusive publications, which reduce the overall deductibility of their gift and may diminish the connection between their donations and a tax break. But for most donors, the data shows that itemizing and receiving the charitable tax deduction increases the likelihood and level of giving. This may mean level giving in 2018 and a reduction in 2019 as diminished incentives become more apparent. Some donors who continue to give may give smaller amounts, or opt not to increase their donations over time.

What can I tell donors or prospective donors about how they might still donate and receive a deduction?

While Americans for the Arts does not offer tax advice and is not a professional tax service, there are certain giving options that you might want to consider sharing with your donors, particularly those on the cusp between taking the new standard deduction or itemizing. These include:

• Bunching. Some tax advisors are suggesting “bunching” to donors, a strategy of giving larger donations every other year in order to itemize their deductions in giving years, while taking the standard deduction in off years. You can help smooth this donor experience by:

  • Offer multi-year memberships in donor programs. Give your donors the opportunity to make a two-year commitment now, by calling out the opportunity on your materials and providing a place to select this option on reply forms.
  • Highlight a mid-tax-year fiscal year end. If your fiscal year ends in the middle of the tax year (June, for example), offering annual donors who typically renew at the end of your fiscal year the opportunity to bunch donations by giving again at the start of the new fiscal year with dedicated messaging (in July, for example).
     
• Donor Advised Funds (DAFs). These funds allow donors to make charitable contributions in to their fund when it is convenient for them (receiving the prospective deduction all at once), and recommend grants to charities over a period of time. Already growing in popularity before the tax bill passed, many donors accelerated their contributions to DAFs or opened new DAFs at the end of 2017 as a vehicle to “bunch” their contributions. The good news is, as long as your organization is a 501c3 nonprofit, your organization doesn’t have to do anything to be able to accept these donations. Donations typically arrive as a check directly from the DAF. That said, you can help encourage these gifts:
• Have gift processing protocols in place for these gifts. Donors to a DAF receive a tax deduction (if they’re taking one) at the time they put the money in to the fund, not when the donation comes to your organization. That means that you do not need to and should not issue a tax receipt to the donor for this gift. You can, however, send a thank you letter to the donor for recommending the grant, if the DAF has provided you with contact information.
• Get familiar with the rules and regulations associated with giving through a DAF. Remember that donors recommending grants through a DAF cannot receive any goods or services for their donation and must “decline benefits” if your donor program has them—including things like gala tickets.
• Consider making it easier for your DAF donors to direct grants to your organization by installing a widget from DAF Direct on your website. This free tool for charities allows donors with DAFs at some of the largest fund management organizations to recommend grants to your organization immediately online.
• IRA Contributions. While not all long-term investment types can aid in pursuing a tax deduction, disbursements from Individual Retirement Accounts (IRAs), in some cases, can. You can support those efforts:
• Flag the option to your older donors. Donors age 70½ or older can contribute up to $100,000 of assets from their Individual Retirement Account directly to your organization and have the gift count toward their annual required distributions from the IRA and removed from their taxable income. These donations will typically arrive directly from the IRA manager on the donor’s behalf.
• Gifts of appreciated stock. Gifts of stock (specifically, appreciated securities) are still exempt from the capital gains tax, which means that even donors who are now taking the standard deduction on their income taxes will see a tax benefit from donating appreciated securities.
  • Be prepared to provide donors with instructions to donate stock to your organization upon request. This will require your organization to have an account to accept stock. Small organizations can consider a third-party service that facilitates stock donations for a small fee, such as Stock Donator.

How can I learn more?

Want to learn more? Try taking a look at these references and resources:

• How to Write Off Donations Under the New Tax Plan: Consider ‘Bunching’ (New York Times)
• Tips for Giving After the Tax Bill (Association of Fundraising Professionals)
• How the 2018 Tax Law INCREASES Charitable Giving Deductions (LinkedIn)
• Tax Policy and Charitable Giving Results (Lilly Family School of Philanthropy/Independent Sector) 
• The House Tax Bill Is Not Very Charitable to Nonprofits (Tax Policy Center)
• The Average American's Charitable Donations: How Do You Compare? (The Motley Fool)
• 21 Million Taxpayers Will Stop Taking Charitable Deductions Under the New Tax Law (Forbes)
• Online Giving Trends (Network for Good/Chronicle of Philanthropy)
• The Final Tax Bill: What Nonprofits Need to Know (Venable LLP)