As a fundraiser, you are likely confused by what the Fiscal Cliff means for your organization. Imagine what your donors think. I have been asked by several of my nonprofit clients what the legislation means to them and those who support them.
Many of the early explanations have been highly technical and geared toward professionals in the tax, legal and financial fields. That’s not very helpful to those in the trenches who are trying to make sense of it all.
I’ve teamed up with Lori Sheets, senior manager-assurance and advisory services, with Bober Markey Fedorovich in Akron, Ohio, to help sort it out. Lori specializes in working with nonprofit organizations, and has helped highlight key points of the Act so it is easier to understand and explain to staff, donors and board members.
Here are the high points:
- People are seeing less in their paychecks. If you haven’t seen a reduction in your own take home pay, you will soon. Disposable income is reduced by 2% for all wage earners beginning the first pay period of January 2013. There was no extension of the temporary Social Security payroll tax cut which was implemented in 2011 to help stimulate the economy. Reduced disposable income may mean reduced donations to charities, particularly donations given via payroll deduction.
- Those earning the most will pay more taxes. The income tax rate for highest earners increased from 35% to 39.6% for individuals earning more than $400,000 annually ($450,000 for couples). “It is possible that higher taxes may reduce the amount they have available for charitable giving,” Sheets said. However, she added, those in this tax bracket who make charitable gifts will see a 7% decrease in the after-tax cost of giving which may be a good incentive to donate to worthy causes.
- High income individuals will continue to have limits on charitable deductions. Taxpayers earning more than $250,000 ($300,000 for couples) will have a limitation on itemized deductions. These limits will reduce high-income individuals’ benefit from charitable contribution deductions.
- Gifts of highly appreciated assets are still very attractive to donors and charities. According to Sheets, “Charitable gifts of highly appreciated assets continue to be advantageous for donors. They can receive an income tax deduction and avoidance of capital gains tax. At certain income thresholds, these gifts are even more effective at lowering tax impact.”
- Donors age 70 ½ or older can continue to use their IRAs to make tax-free contributions up to $100,000. Legislators extended this key provision of The Pension Protection Act of 2006 until the end of 2013. Donors can still take advantage of this extension for their 2012 tax year if they make a transfer directly to charity by January 31, 2013.
Other key points
- There are enhanced deductions for contributions of food inventories (Code Section 170(e)(3)(C)(iv))
- There are favorable deductions for donating conservation interests (Code Section 170(b)(1)(E)(vi))
- There are changes regarding contributions of property by S Corporations.(Code Section 1367(a))
- Enhanced charitable deductions for contributions of book inventories to public schools and corporate contributions of computer inventory were not extended.
Whenever there are changes to tax laws that impact charitable giving, it takes some time to figure things out. Donors may be skittish or decide to postpone their giving until they know more about how the laws affect them.
Ultimately, during any time of change or uncertainty, it is important to maintain strong relationships with donors. They may have to make choices regarding their charitable giving, so the organizations they feel the most connected to are going to continue to be the recipients of their generosity. So, while it may seem appealing to spend most of your time courting your new prospects, don’t forget your current donors who currently have you at the top of their list.
This post is for general information purposes only. For additional information and analysis on the American Taxpayer Relief Act of 2012 and its impact on nonprofits, contact an accounting or tax law professional. We also recommend the following resources for more in-depth analysis or information:
- The Internal Revenue Service: www.irs.gov
- Urban Institute: www.urban.org
- Association of Fundraising Professionals: www.afpnet.org