Will Tax Policies Change Donation Habits in 2013?

Tara Greco is senior director in APCO Worldwide’s corporate responsibility practice and Chris McCannell is director in APCO’s government relations practice.

According to data provided by Independent Sector, high-income donors contribute 36 percent of the money given by individuals to charities (CBO), and 85 percent of high-wealth individuals give to organizations that address basic needs (IUPUI Center on Philanthropy). Without this cohort making significant financial contributions, mission-driven organizations would be hard pressed to provide quality, reliable assistance and programs such as soup kitchens, after-school tutoring and job training programs. Donations, not tax dollars, are fueling these organizations. And, even though we would like to believe that people give out of the goodness of their hearts—the reality is that they don’t. Whether it is an individual, a private enterprise or a collection of like-minded people, there’s always some return expected when making an investment. (And yes, a donation IS an investment.) That ROI takes many forms—recognition, access, alignment with goals and beliefs. And for some people, the tax breaks are part of the calculus in making a donation.

So the fiscal cliff bill that was voted into law this week could have a significant impact on charitable giving in 2013. Some philanthropists decided to double down at the end of 2012, by donating additional funds or moving extra money into their personal charitable foundation. Others are waiting to see how things sort out this spring. Either way, high-income donors and non-profit executives will be paying close attention to this ongoing tax and spending conversation in Washington DC because of the uncertainty.

We expect some of the following issues to generate the most discussion and attract the most attention:

1. Capital gains taxes: The fiscal cliff legislation raised the tax rate on capital gains to 20% for individuals with over $400,000 in annual income and $450,000 for a family. Since high-income donors often consider the donation of stock or selling stock to make a donation as an option in their charitable investment plan, this could change their behavior because those gains will now be taxed at a higher rate.
2. Itemized deductions: With Congress still having to debate raising the borrowing authority of the US, the so-called debt ceiling, and the pending budget sequestration, many observers see a risk of Congress limiting annual deductions for individuals.  With potential limits on itemized deductions, high income families will likely have to choose between deductions for mortgages, retirement investments, education and other competing factors in deciding where to focus their resources.  In addition to competing for financial resources, charities could potentially compete for a place in a limited amount of capped tax exemptions.
3. Estate taxes: The new legislation allows for a $5 million individual and $10 million couple exemption of estate taxes but also charges a higher 40% rate to estates above that level. This higher tax rate could provide an incentive for high net worth individuals to engage in estate planning to make charitable donations to limit the amount subject to the new higher 40% tax.