Will tax reform hurt charitable giving?

Americans are a generous, charitable bunch, right? We shall start to find out in earnest pretty quickly.

The waning weeks of the year mark the start of the philanthropic high season, when many nonprofit groups in Arizona and elsewhere generate large proportions of their yearly revenue. This giving season is the first since Congress approved tax-reform legislation that makes it less advantageous for a lot of people to donate money.

“The real test comes this month and next,” said Jerry Diaz, chief development and marketing officer for Ronald McDonald House Charities in Phoenix. He was referring to the traditional rise in charitable giving toward year’s end, often motivated by tax reasons.

Hence the importance of programs, such as Season for Sharing, that educate people about the many other benefits their donations provide.

Americans still can write off the amounts they donate, but that won’t help unless their overall deductions — for charity, property taxes, mortgage interest and more — exceed what they could take as a standard deduction. Tax reform nearly doubled the standard deduction for 2018. It’s now $12,000 for individuals and $24,000 for married couples.

Federal tax reform didn’t directly affect Arizona’s tax credits that support hundreds of charities and foster-care organizations. (More information is available at azdor.gov, the website of the Arizona Department of Revenue.)

For this reason, Diaz predicts his group and others will focus their marketing pitches on the Arizona credits, which are unaffected, rather than on federal deductions, which will change for a lot of people.

Steven Seleznow, president and CEO of the Arizona Community Foundation, said he thinks charities that rely mostly on small donors could feel the impact more from the federal changes than those organizations with many wealthy, foundation and corporate supporters — groups that tend to give more consistently.

“These nonprofits are working hard to make sure people continue to support them and to get their stories out about the success their programs have had,” he said.

Prior to tax reform, roughly 70 percent of Americans didn’t itemize. Posttax-reform, that figure could rise to about 90 percent, according to the Treasury Department.

“Most research concludes that nearly doubling the standard deduction for individuals and couples may substantially reduce household giving,” said a February report by the Lilly Family School of Philanthropy at Indiana University.

Taxes aren’t the only factor affecting donations. Unfortunately, the recent stock-market decline also might exert a drag, making investors feel less wealthy and less charitably inclined. In 2017, the stock market jumped 22 percent, including dividends. This year, through October, it was basically flat.

Americans donated a record $410 billion in 2017, up from $390 billion in 2016, reported GivingUSA, with the group citing stock-market gains last year as a big catalyst.

On the other hand, corporate profits have surged — thanks largely to tax reform — so businesses might give more. Also, the economy is healthy, with job growth robust and consumer confidence buoyant.

A Fidelity Investments survey of people who donated and itemized deductions in 2017 indicates that for most, their commitment to giving remains strong despite tax reform. In the survey conducted this year, 82 percent of donors who itemized in the past said they plan to maintain or increase their giving in 2018.

However, many of these people might not realize that itemizing might no longer make sense for them.

“These donors know about tax reform in the abstract but have not fully considered how the increased standard deduction affects them,” Fidelity said.

Kristen Merrifield, CEO of the Alliance of Arizona Nonprofits, said feedback from more than 200 charities operating in the state indicates this is a concern, with a lot of people not yet having thought through the personal implications of tax reform.

“For a lot of people, the light bulb won’t go on until they file their taxes in 2019,” she said. Any donation drop-off thus might not be fully felt until next year.

One strategy that might become more prevalent is “bunching”: boosting charitable contributions and thus itemized deductions every two or three years to exceed the $12,000 or $24,000 threshold, while taking the standard deduction in other years.

Bunching works especially well with charitable contributions because most people have broad flexibility to increase or decrease their donations at any time.

If more people bunch their itemized deductions, the overall amount of charitable donations might not vary all that much over the long run, though it could vary widely at the personal level, according to the Indiana University study.

Merrifield also sees bunching as a strategy that could become more prevalent, especially among higher-income taxpayers who do more planning.

Seleznow said he’s hopeful that charities will continue to receive support with or without tax benefits, noting that most donors recognize the many pressing community needs that must be met. But he acknowledged that plenty of nonprofits are watching closely now that the traditional year-end giving season is underway.