FEWER DONORS

Chil­dren’s hos­pi­tals brace for tax re­form’s un­in­tended con­se­quence:

Modern Healthcare - - News - By Tara Ban­now

CHIL­DREN’S HOS­PI­TALS could be un­in­tended vic­tims of changes handed down by the Trump ad­min­is­tra­tion’s sweep­ing tax re­form law. That’s be­cause the Tax Cuts and Jobs Act, signed into law in De­cem­ber 2017, could dis­in­cen­tivize char­i­ta­ble giv­ing by con­vinc­ing mil­lions of tax fil­ers to go from item­iz­ing their de­duc­tions to tak­ing the stan­dard de­duc­tion, thus elim­i­nat­ing the tax bonus for char­i­ta­ble do­na­tions.

The law dou­bled the value of the stan­dard de­duc­tion in­di­vid­u­als and cou­ples can claim on their in­come taxes, mak­ing it a more at­trac­tive op­tion than item­iz­ing de­duc­tions, which lets fil­ers list in­di­vid­ual de­duc­tions and re­ceive req­ui­site tax breaks, in­clud­ing for do­na­tions to chil­dren’s hos­pi­tals. Fil­ers can choose which­ever op­tion yields a higher de­duc­tion.

“This could im­pact us dra­mat­i­cally and ob­vi­ously I hope it doesn’t, but we’re watch­ing that,” said Jen­nifer Dar­ling, CEO of the Chil­dren’s Hospi­tal Colorado Foun­da­tion.

Chil­dren’s hospi­tal ex­ec­u­tives in­ter­viewed for this ar­ti­cle said while they’re not see­ing slow­downs in giv­ing yet—es­pe­cially not dur­ing peak giv­ing sea­son in Novem­ber and De­cem­ber—they worry that could change in 2019, es­pe­cially after donors work with tax pre­par­ers to file their re­turns in April and come to un­der­stand the tax law’s im­pli­ca­tions.

The change isn’t likely to af­fect the be­hav­ior of smaller donors who give a cou­ple hun­dred dol­lars per year. Nor will it af­fect those who give hun­dreds of thou­sands or even mil­lions of dol­lars per year. Rather, it’s the mid­dle-tier donors hos­pi­tals are wor­ried about los­ing.

The Chil­dren’s Med­i­cal Cen­ter Foun­da­tion, which sup­ports chil­dren’s hos­pi­tals in Dal­las and Plano, Texas, is al­ready see­ing a de­cline in its mid­dle tier of donors, which it con­sid­ers those who give be­tween $10,000 and $1 mil­lion, said Brent Christo­pher, the Dal­las-based foun­da­tion’s pres­i­dent.

The stan­dard de­duc­tion for joint fil­ers is now $24,000, up from $13,000. That, cou­pled with the fact that de­duc­tions for mort­gage in­ter­est and prop­erty taxes are now lim­ited to $10,000, is ex­pected to dra­mat­i­cally in­crease the num­ber of fil­ers choos­ing stan­dard de­duc­tions. The num­ber of item­ized fil­ers is ex­pected to shrink from 46.5 mil­lion in 2017 to about 18 mil­lion in 2018, ac­cord­ing to the Joint Com­mit­tee on Tax­a­tion, im­ply­ing that 28.5 mil­lion cou­ples will opt for the stan­dard de­duc­tion.

Con­sider a fam­ily who earns $100,000 a year, typ­i­cally gives $10,000 in char­i­ta­ble do­na­tions and plans to deduct the max­i­mum $10,000 on their prop­erty taxes. That $20,000

to­tal is less than the stan­dard de­duc­tion, so the fam­ily would likely opt for the stan­dard de­duc­tion.

“So they would get ab­so­lutely no tax ben­e­fit to giv­ing $10,000 to a char­ity, whether it’s to the chil­dren’s hospi­tal in full or whether part of that $10,000 is dis­trib­uted to other en­ti­ties,” said Dr. Karen Meador, se­nior physi­cian ex­ec­u­tive at the BDO Cen­ter for Health­care Ex­cel­lence & In­no­va­tion.

Not only is item­iz­ing de­duc­tions more work, it also ex­poses a filer to ad­di­tional au­dit risk, Meador said.

How much a spe­cific hospi­tal could be af­fected de­pends on how much of its to­tal fundrais­ing comes from in­di­vid­u­als ver­sus or­ga­ni­za­tions. In fis­cal 2018, 68% of do­na­tions hos­pi­tals re­ceived came from in­di­vid­u­als, ac­cord­ing to the As­so­ci­a­tion for Health­care Phi­lan­thropy.

At the Chil­dren’s Hospi­tal Colorado Foun­da­tion, 85% of do­na­tions come from in­di­vid­u­als, mak­ing the hospi­tal more vul­ner­a­ble to the po­ten­tial changes. The Chil­dren’s In­sti­tute of Pitts­burgh, by con­trast, gets only half of its to­tal do­na­tions from in­di­vid­u­als, a trait that could be ad­van­ta­geous in this case, said Emily Pe­ters, the hospi­tal’s vice pres­i­dent of in­sti­tu­tional ad­vance­ment.

Lim­ited ef­fect, for now

Over­all fundrais­ing num­bers are still strong, how­ever, thanks to sta­ble in­come from larger gifts. But even so, Christo­pher wor­ries the new law, which re­moves the giv­ing in­cen­tives for that very group, could hurt the foun­da­tion.

“We had al­ready seen a lit­tle bit of a de­cline in the midrange of giv­ing, which again may be ex­ac­er­bated now by the in­flu­ence of the pro­vi­sions of the new tax law,” he said.

Most chil­dren’s hospi­tal ad­min­is­tra­tors said the tax law won’t change their mes­sag­ing to po­ten­tial donors. Cam­paigns will still fo­cus on how the money is used: the life-threat­en­ing ill­nesses cured, the high pro­por­tion of Med­i­caid pa­tients treated and the innovative re­search be­ing per­formed.

“That’s where we spend all of our time—com­mu­ni­cat­ing what im­pact the donor can have on chil­dren,” said Tim Robin­son, chief fi­nan­cial of­fi­cer of Na­tion­wide Chil­dren’s Hospi­tal in Colum­bus, Ohio.

Ad­min­is­tra­tors agreed that donors are more driven by their emo­tional desire to give to an or­ga­ni­za­tion they be­lieve in and less by tax in­cen­tives.

“The tax ben­e­fit re­ally is low on their list of mo­ti­va­tors,” said Erin Marku­son, as­sis­tant vice pres­i­dent of ma­jor gifts at Lurie Chil­dren’s Hospi­tal Foun­da­tion in Chicago. “They’re re­ally truly look­ing to make a dif­fer­ence. They want to have a mean­ing­ful im­pact with their phi­lan­thropy, re­gard­less of whether they get a tax ben­e­fit as a re­sult of their do­na­tion.”

Some be­lieve the tax law could also have pos­i­tive ef­fects on phi­lan­thropies.

In ad­di­tion to the lower tax rate, lots of peo­ple will re­ceive larger de­duc­tions un­der the new law than in the past, said Pa­tri­cia Fries, direc­tor of gift plan­ning for Uni­ver­sity Hos­pi­tals and Rain­bow Ba­bies & Chil­dren’s Hospi­tal in Cleve­land. On top of that, the tax law re­pealed the so-called Pease lim­i­ta­tion, which capped high earn­ers’ item­ized de­duc­tions.

“That has al­lowed peo­ple to keep more of the money they’ve earned and there­fore they have more dis­cre­tionary in­come than ever, which they can use for char­i­ta­ble plan­ning pur­poses,” Fries said. “There is the pos­si­bil­ity that it may come out to be an even big­ger phil­an­thropic year when all is said and done.”

The whole point of tax re­form was to boost the Amer­i­can econ­omy: to grow gross domestic prod­uct and house­hold wealth, said Christo­pher of the Chil­dren’s Med­i­cal Cen­ter Foun­da­tion.

“If the net re­sult down the road of tax re­form is that it can ac­tu­ally strengthen and boost the vi­tal­ity of the Amer­i­can econ­omy, it may em­power donors to want to give more and in­vest more in the causes they re­ally care about,” he said. “We hope that will be true, but we’re re­al­is­tic in know­ing that the trends have been head­ing in the other di­rec­tion in terms of the num­ber of givers and that the likely ef­fect of some of the pro­vi­sions in tax re­form are go­ing to be that they may dis­in­cen­tivize or slightly de­press giv­ing.”

Betsy Chapin Tay­lor, pres­i­dent of con­sult­ing firm Ac­cor­dant Phi­lan­thropy, said it’s still un­clear what, if any, im­pact the tax law will have on chil­dren’s hospi­tal fundrais­ing.

“Tax ad­van­tages may mean they can sim­ply do more,” she said. “But I don’t think it will de­ter­mine if they give. I think it will just de­ter­mine how they give.”

Some stake­hold­ers and law­mak­ers are cham­pi­oning the idea of a univer­sal char­i­ta­ble de­duc­tion that in­di­vid­u­als and cou­ples can take on top of the stan­dard de­duc­tion. A few pro­pos­als have been in­tro­duced in Congress. An In­di­ana Uni­ver­sity study found such a de­duc­tion would in­crease char­i­ta­ble giv­ing by about $18 bil­lion.

Some ad­vo­cates are also push­ing to have the char­i­ta­ble de­duc­tion dead­line pushed to April 15. If that were the case, fil­ers would make more log­i­cal giv­ing de­ci­sions based on their tax re­turns, Christo­pher said.

“That has a fair amount of trac­tion in Wash­ing­ton right now,” he said.

In the ab­sence of leg­isla­tive so­lu­tions, Christo­pher said he en­cour­ages donors to bunch their gifts and do­nate ev­ery two or three years in­stead of an­nu­ally. That al­lows them to item­ize and claim a large de­duc­tion in the year they do­nate, and then re­turn to tak­ing stan­dard de­duc­tions in the off years, he said. He is also cham­pi­oning a lit­tle-known pro­vi­sion of the tax code that al­lows peo­ple who are at least 70½ years old to make di­rect rollover gifts from in­di­vid­ual re­tire­ment ac­counts.

“I think the mo­ti­va­tion is personal and it’s emo­tion­ally driven and it’s be­cause of a desire to make a dif­fer­ence,” Christo­pher said. “But I do think the tax code shapes those gifts around the tim­ing and the size and which par­tic­u­lar tools, which par­tic­u­lar as­sets the donors want to use.” ●

In fis­cal 2018, 68% of do­na­tions hos­pi­tals re­ceived came from in­di­vid­u­als, ac­cord­ing to the As­so­ci­a­tion for Health­care Phi­lan­thropy.

EMILY OLSEN

Do­na­tions to Lurie Chil­dren’s Hospi­tal in Chicago sup­port the hospi­tal in gen­eral, such as its video wall, above. Spe­cific donors are listed on a recog­ni­tion wall or hon­ored with plaques such as those on an el­e­va­tor and the fam­ily great room, right.

EMILY OLSEN

EMILY OLSEN

Lurie Chil­dren’s Hospi­tal pays trib­ute to its donors.

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