Whenever a new political administration descends upon Washington, D.C., one thing is certain: tax policy will be part of the transition conversation. However, few recent politicians have been as passionate about reform as President Donald Trump, and although some specifics of his tax policy remain uncertain, some aspects have come to light. There are three that directly affect fundraisers:
- Individuals can currently write off 50% of their adjusted gross income by deducting gifts to qualified charities. Gifts to private foundations carry a 30% write off. President Trump’s proposed plan would cap that at $100,000 for single filers and $200,000 for married couples.
- President Trump’s plan also proposes reducing the existing seven Marginal Income-Tax Rates to three, which would mean tax brackets of 12%, 25%, and 33%. With the income tax rate lowered, charitable giving would lose some of the ancillary benefit for the highly-taxed donor.
- Finally, the President’s plan calls for a repeal of the Estate Tax, a 40% tax levied when the head of the estate passes away. However, the Estate Tax is only enforced if the estate in question holds more than $5.49 million in value. Currently, charitable gifts are deductible under the Estate Tax and can defray the amount owed to the government. If the Estate Tax were repealed, this would of course, potentially de-incentivize giving to reduce tax burden.
Regrouping and Reengaging
You may be thinking: How is this not bad news for fundraisers? Certain industry studies estimate that the President’s incubating tax plan could land a considerable (some estimate $1 billion) upset to non-profit organizations. However, there are some silver linings in the clouds if you look closely.
When we discuss tax reform, there are two types of donors who come into play:
The “Reflex” Donor: This person gives out of sheer habit, and the habit can be either generational (someone in their family or another loved one gave), or they’ve been doing it for twenty years and it’s like paying the rent or a credit card bill. It’s possible that they may be paying using their credit card and have even stopped noticing the yearly/monthly deduction being taken out of their account.
The “Heart” Donor: This person can certainly be generational, or they may have been giving for twenty years of their own volition; however, one thing they share is their commitment to the cause, which is anything but habitual. They care and are still involved. They may volunteer, sit on boards, or advocate to their friends. In contrast to the “reflex” donor, their passion for the organization has only increased over the years, becoming an integral part of their social life, identity, and persona.
These two types of divergent donors present unique opportunities for the philanthropy field. Organizations that have grown sclerotic or overly comfortable and rely on “reflex” donors will in all likelihood suffer a tremendous setback if the President’s suggested tax plan passes. They have been sitting back, inactive, and relying on a seemingly endless train of people giving out of habit or taking advantage of tax relief, and due to internal complacency, will probably lack a contingency plan.
Therefore, in the face of a potential rewrite of the tax codes, non-profit organizations need to retrench, regroup, and rethink their operations strategy. They need to relearn stewardship; reengage lapsed donors and cultivate new ones; streamline and hone their mission statements to increase support; and likely scrub a decade or more’s worth of inoperable data. The fundraiser’s tool kit will be essential if large numbers of “reflex” donors exit an organization en masse due to lack of tax incentive.
Conversely, organizations that are stacked with “heart” donors could see an influx of contributions – if and when – the President’s potential plan frees up a significant portion of their expendable monies. Whether or not the tax incentive exists, the “heart” donor would give to their favorite non-profits, but with more cash flowing directly into their pockets, it makes sense that they would give even more. This scenario is also a potential boon to non-profits with a significant slate of “heart” donors, as it may be the perfect time to launch a new campaign effort with loftier goals.
If an organization is overly dependent on “reflex” donors, they are going to feel real, genuine pain, and will require serious strategic maneuvering – such as outreach to lapsed donors and significant outreach to cultivate new prospects – to ensure their long-term viability. However, we do see a tremendous upside to organizations that are fortunate enough to have generous “heart” donors as their guardian angels.
Ending on an optimistic note, in either scenario, there are tremendous new opportunities for fundraisers to aid an organization in either situation to steer their way through a radically restructured tax policy.
About the Author
Aly Mennuti has worked extensively with associations, faith-based organizations, and human service organizations. Her areas of expertise include increasing levels of annual giving and major gifts and helping local and national non-profits launch capital campaigns, recruit and manage volunteers, and coordinate events.