The 2017 Tax Cuts and Jobs Act represents a dramatic change for American nonprofits. Experts estimate it could result in a decline in charitable giving ranging from $12 billion to $20 billion annually. Below are the major changes that will most directly impact U.S. higher education advancement leaders.
- Doubling of the standard deduction to $12,000 for single filers and $24,000 for married filed jointly
- Reduction of the corporate tax rate to a flat 21%
- Increase in the amount of money exempted under the estate tax
- Elimination of the 80% charitable deduction for college event seating rights
- A 21% tax on compensation in excess of $1 million for the five highest-paid employees at a nonprofit
- A 1.4% excise tax on private universities with endowments greater than $500,000 per student
- Increase in the amount of adjusted gross income (AGI) that can be deducted for charitable contributions from 50% to 60%
Since much of the legislation was in flux until the final vote, advancement leaders have just now begun to explore how this act will affect their operations, communications, and donor relationships. The impact will no doubt be momentous.
We anticipate that advancement leaders will face an uncertain environment for mid-level giving, planned giving, and corporate giving in the years to come. However, major-gift opportunities will likely increase, since high-net-worth individuals will have greater incentives to deduct charitable gifts—as well as more financial resources with which to make those gifts.
EAB’s analysis below focuses on four ways advancement leaders can mitigate the risks they face and capitalize on new opportunities under the tax law.
1. “Demonstrating impact” is now a business imperative
In 2018, 21 million U.S. taxpayers will likely claim the new increased standard deduction, thereby eliminating their tax incentive for charitable giving. While tax breaks are not the only reason people support nonprofits, increasing the standard deduction does raise the “economic price to give.” Research from the Lily School of Philanthropy shows that this higher “cost” can produce a decline in donations.
As the cost of giving goes up, colleges and universities must double down on ensuring that donors see the value of philanthropy. The case for support must be stronger than ever. To this end, it is imperative for advancement leaders to focus on communicating gift impact.
This is especially important for those middle- and upper-middle-class donors most likely to be affected by the doubling of the standard deduction. These households often give leadership annual gifts between $1,000 and $25,000, and they may now find themselves reevaluating their philanthropic habits in light of their realigned incentives.
When they make future gifts, these donors will prioritize contributions to nonprofits where they can drive change and see tangible results today. Generic solicitations, form thank you letters, and vague statements about impact are no longer enough to acquire and retain these donors.
2. Advancement must highlight the reasons to give today
Even among donors who continue to give generously, the new legislation is likely to alter the timing of their charitable behavior. The coming years will likely see more donors turning to Donor Advised Funds (DAFs) and engaging in gift bunching in order to maximize tax benefits.
This unpredictability poses great risks for advancement professionals facing ever-rising annual fundraising goals. At many institutions, a “down year” is simply unacceptable. Advancement leaders must find ways to entice donors to give consistently, year-in and year-out.
Targeted, compelling fundraising appeals can create urgency among donors who would otherwise defer their giving. Gift match challenges, society membership incentives, and compelling “fundraising products” all have the potential to counteract the unfortunate gift-timing effects of the tax law.
3. Big ideas are necessary to thrive in a crowded major gift space
Under the new legislation, the wealthiest Americans will have an even greater tax incentive to give. A larger percentage of their adjusted gross income will now be eligible for charitable deductions. At the same time, the revised tax brackets mean that the highest-earning households will have more disposable income with which to make philanthropic gifts. For college and universities that tend to succeed in the major-gift space, this is great news in the short-term.
Yet advancement leaders should not take major-gift gains as a given. Higher education will face increased competition for donor mindshare and dollars in the years to come as non-profits intensify their major giving work and launch more ambitious capital campaigns.
College and university fundraisers must take proactive action to capitalize on the current major-gift friendly environment by focusing on the big ideas and problem-oriented proposals that today’s donor-investors find appealing.
4. Guard against a lost generation of donors
As major-gift opportunities proliferate and the environment for leadership annual giving worsens, advancement professionals may find it tempting to shift their focus exclusively to the top of their giving pyramids.
Doing so brings with it great risk. Ignoring mid-capacity donors today undermines the long-term major gift pipeline that colleges and universities rely on. Major gifts are the culmination of years of giving to and engagement with an institution, and underinvestment in this area will produce a dangerous degree of unsustainability for the advancement enterprise.
To prevent a further narrowing of the giving pyramid, advancement leaders must ensure that “pipeline donors” receive the sorts of high-touch cultivation that will advance them slowly but surely toward major gifts.