With the presidential election behind us and the status quo retained, what does this mean for charitable giving as we approach year-end?
Over the last three months, this was the number one question on people’s minds – “What happens if after the election, we have the same parties in control of the House, Senate and Presidency? After all, there were lots of tax reform proposals out there during the campaign and we are about to go over the ‘Fiscal Cliff.’”
While we don’t have a crystal ball, we are certain about three things which should shape how you approach year-end 2012 and the start of 2013.
Are You Prepared for 2013
Tax Law Changes?
1) People give to your charitable mission. Survey after survey has shown us that donors are motivated to give because they believe in your charitable mission. They want to support your cause, particularly when you tell stories that illustrate the long-term positive outcomes that philanthropy has helped to create. So as you put together your final appeals, your focus, whether for outright or legacy gifts, should be on your mission. Do a good job marketing your outcomes-based stories and gifts will come in the door at year-end.
2) The majority of charitable gifts are not tax deductible. While there has been much written about the impact of changing tax laws on philanthropy (and it could be significant) remember that the majority of charitable gifts by individuals are not deducted on individual tax returns. They are made by people who either do not have enough other deductions to itemize, or for other reasons, simply do not claim an income tax charitable deduction. These gifts do not make up the majority of dollars donated, but they are from the majority of your donors. So most of your donors are not particularly interested in the value of the income tax charitable deduction. When working on year-end gifts, which tend to focus on gift volume rather than dollar value, the income tax charitable deduction is simply less important.
3) High net worth donors want to make gifts which are tax-efficient. While the majority of individual gifts are not deducted on tax returns, almost all gifts by high net worth donors are claimed. When high net worth donors make charitable gifts, they expect them to be as tax-efficient as possible. We are often told by high net worth donors that while tax considerations don’t motivate gifts, they help get them done. Here is what we would share with high net worth donors approaching year end:
- Taxes will go up in 2013.
It seems unlikely that anyone fitting the category of a high net worth donor is going to see lower taxes in 2013. The expiration of the Bush Era tax cuts means an across-the-board increase in income tax, estate tax, gift tax and generation-skipping tax rates. Even if Congress and the president enact some type of extension or adjustment, both parties have agreed that they will make changes to the Tax Code that either increase rates or reduce loopholes, which means higher taxes. Your high net worth donors should have already adjusted their tax plans or will be scrambling to see their planners right now to take advantage of the many expiring tax law provisions (particularly the $5.12 million gift tax exemption amount) prior to the end of 2012. In addition, there are several new taxes in the health care law that will drive up the real taxes paid by high net worth donors in 2013. Knowing that taxes will go up, advisors would normally suggest that donors hold off on making charitable gifts until after January 1, to get the maximum tax benefit for each dollar donated, but…
- The charitable deduction may or may not be fully available in 2013.
Each of President Obama’s proposed budgets has included a provision that would limit the deductibility of charitable gifts. As part of the fiscal cliff negotiations, he has suggested capping deductions for anyone above the 28% bracket, and more recently, anyone in the 35% or above tax brackets. House Speaker Boehner’s tax plan calls for a cap on deductions generally, including the income tax charitable deduction in some form. With the government looking for ways to increase tax receipts, the charitable community can no longer be certain that by the end of the negotiations that the charitable deduction will emerge intact for 2013 and beyond.
This leaves your high net worth donors with a difficult choice – do they hold off on making larger charitable gifts in 2012 in the hopes that they can be more tax-efficient by waiting for higher tax rates in 2013, or do they lock in their 2012 charitable deductions at the lower rates, because who knows if the full charitable deduction will be available in 2013?
Which brings us back to our first point – it is all about mission. Since we cannot control or predict what Congress is going to do, we should focus on telling outcomes-based stories about mission and let our donors make their own choice about whether it is better to make a gift now, or wait until 2013.
Brian M. Sagrestano, JD, CFRE