U.S. charities might be another victim of fiscal cliff

Impasse on tax policy could hurt philanthropic giving this season

Nov 25, 2012 @ 12:01 am

By Andrew Osterland

+ Zoom
(Jonathan Lockwood Smith)

Although the holidays are the season of giving, heading into the crucial month of December, the impasse on tax policy in Washington is clouding the picture on Americans' plans for charitable giving.

From charities' perspective, the good news is that Americans' propensity to give seems to have recovered substantially from the financial crisis four years ago and the recession that followed.


Despite the weak economy, total giving in the U.S. last year rose 4% from 2010 to $298 billion, according to the annual Giving USA report. Though well below the $311 billion in 2007, that figure is a sharp improvement from the $274 billion in 2009.

The trend appears mildly positive again, said Geoffrey Brown, executive director of The Giving Institute, which launched the Giving USA foundation in 1985.

“We're not where we were pre-recession, but overall it seems that charitable giving is returning to a more consistent level,” he said.

Natural disasters such as Hurricane Sandy, which devastated the mid-Atlantic region last month, can have ambiguous effects on trends for charitable contributions. They tend to elicit an immediate response — about $120 million has been raised in the private sector for Sandy relief — but can also present a challenge to groups that must compete for finite dollars.

“Generally, natural disasters provide a bump in charitable giving overall, but Sandy may have the effect of hurting donations to some organizations,” Mr. Brown said. “We haven't seen evidence of it yet, but charities that would have otherwise attracted contributors might feel the pinch.”

The Yorkville Common Pantry, the largest single-site community food provider in New York state, is definitely feeling the pinch.


The pantry had received some Sandy-specific funding from foundations and individuals to provide emergency food aid in the region, but its crucial fundraising effort during the Thanksgiving season has suffered, said Steven Grimaldi, executive director of the New York-based charity.

“People have, not surprisingly, focused on Sandy, and our usual level of giving is down,” he said. “Our hope is that people see the emergency food relief we provide and understand that we provide these services 365 days of the year.”

Charitable-giving experts estimate that about 20% of donations are made during the holiday season, and the big unknown this year is what impact uncertainty about taxes will have on people's giving.

The wealthiest Americans, at least, say that the muddled tax picture won't affect their charitable impulses.

The biannual Bank of America Corp. survey of high-net-worth philanthropy found that taxes aren't a big motivating factor for the wealthy when it comes to giving.

In fact, half of the 700 households surveyed with net worth of more than $1 million said that they will maintain their giving levels (about 9% of annual income) even if income tax deductions for contributions are eliminated.

“There's a myth out there that people give for tax reasons,” said Claire Costello, national philanthropic-practice executive for U.S. Trust Bank of America Private Wealth Management.

Suzanne Shier, director of wealth planning and tax strategy at Northern Trust Corp., agrees that wealthy Americans' primary motivation is to support causes with which they feel aligned.


Though taxes may not be the prime consideration for charity, they are significant.

“If you're going to give, you should give in the most tax-efficient way you can,” Ms. Shier said.

The difficulty this year is determining what that is.

On one hand, a rise in top marginal income tax rates next year, which President Barack Obama has insisted must be part of any budget deal, would make charitable deductions more valuable in 2013 from a tax perspective. A gift made Jan. 1, versus Dec. 31, could save large donors thousands on their tax bill.

But if Republicans stick to their pledge to fight tax rate increases, the compromise may be a cap or limit on deductions. That could make the charitable-gift deduction significantly smaller next year, spurring people to front-load their giving this year.

“I don't have a crystal ball, but if itemized deductions are limited to $25,000 next year, it's going to affect charitable giving,” said Howard Helsinger, a partner at law firm Sugar Felsenthal Grais & Hammer LLP who advises on estate and tax planning.

So is it better to take the certain deduction this year or wait to maybe get a bigger bang for the gift buck next year?

“I don't feel like rolling the dice with this president and this Congress,” said Joel Isaacson, chief executive of registered investment advisory Joel Isaacson & Co. “With the certainty of the 35% deduction this year, we're advising clients to load up their contributions this year if they can and want to.”


Mr. Isaacson recommends that clients contribute two or three times their normal annual gifts and put the money — or better yet, appreciated stocks or other assets — into a donor-advised charitable fund.

People can take the full deduction this year and maintain some influence over how their contributions are distributed down the road. If donors run up against the charitable deduction limit of 50% of annual adjusted gross income (30% if assets, not cash, are contributed), they can carry the deductions forward up to five years.

Donor-advised funds such as the Fidelity Charitable Fund have become extremely popular with advisers. The Fidelity fund, the largest in the country, manages $7.9 billion.

Year-to-date through September, the fund had taken in $1.2 billion and had distributed $961 million to charities. The fund’s donors have also recommended more than 3,000 grants totaling more than $10 million for Sandy-related relief efforts since late October, said Amy Danforth, senior vice president of marketing at Fidelity Charitable.

Advisers refer more than 55% of the new accounts and contributions. “The fund resonates with advisers,” Ms. Danforth said.

Some are counseling clients to take the known charitable deduction this year, but Chad Norfolk, principal and lead adviser at FAI Wealth Management, suggests waiting.

“With the threat of higher income tax rates, higher capital gain rates, and lower estate and gift tax exclusions, it may benefit clients to give more in future years,” he said.

Steve Wittenberg, an estate- and tax-planning director with SEI Private Wealth Management, also thinks that organizations could see fewer donations this holiday season.

He expects, however, that charities will be big beneficiaries over the next five to 10 years as more baby boomers retire and transfer trillions of dollars to the next generation.

“Nonprofits shouldn't be discouraged if giving drops this year,” Mr. Wittenberg said.

aosterland@investmentnews.com Twitter: @aoreport


What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

Apr 30


Retirement Income Summit

Join InvestmentNews at the 12th annual Retirement Income Summit - the industry's premier retirement planning conference.Much has changed - and much remains to be learned. Attend and discuss how the future is full of opportunity for ... Learn more

Featured video


How to redesign, rebrand and recast your practice

Redesigning and reshaping your practice is a tough pill to swallow for advisers. But what got you here won't get you there, says John Kozuch, a Chicago financial adviser.

Video Spotlight

The Search for Income

Sponsored by PGIM Investments

Recommended Video

Path to growth

Latest news & opinion

T. Rowe Price steps up its game to serve financial advisers

The Baltimore-based mutual fund giant is more aggressively targeting financial advisers with a beefed-up wholesale crew and placement on custodial platforms.

The most important tax changes for 2018

The Internal Revenue Service issued inflation adjustments to more than 50 tax provisions for 2018.

Shift to Roth 401(k)s 'highly likely' part of tax reform: former Treasury official Mark Iwry

Mandated contributions to Roth accounts would likely only be partial, as opposed to having a full repeal of pre-tax accounts.

E*Trade acquiring custodian Trust Company of America

Discount broker buying second-tier custodian for $275 million.

Another thousand Dow points higher, and investors yawn

Market milestones keep falling like dominoes, with 51 records broken so far this year.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print