Your Money: Charitable granting soars even as tax changes transform giving

NEW YORK (Reuters) – Despite tax reforms that changed an important incentive for giving to charities last year, Americans are still giving away record amounts – just from funds they had put aside for donations in previous years.

Fidelity Charitable said on Wednesday it has already surpassed its granting record from 2018, with $5.25 billion given to 125,000 different non-profits so far in 2019. And that’s with the traditional “giving season,” that starts around Thanksgiving and runs to the new year, still six weeks away.

If the rest of this year matches last year, which included a slow December because of stock market volatility, Fidelity Charitable could tally up another $1 billion in giving before the end of 2019, said Pam Norley, president of Fidelity Charitable.

Still, this massive giving belies deep behavioral and demographic changes going on in the philanthropic world, that have non-profit organizations worried nonetheless.

There is still a tax deduction for charitable giving on the U.S. tax return, but many millions fewer people now itemize their deductions because the tax reform doubled the standard deduction. So, that incentive to give at the end of the year for the tax deduction is gone for most.

While Fidelity Charitable also had a record year of grants going out to charities in 2018, incoming donations for that year were down 1.1% nationwide, according to Giving USA.

The long-term impact of this change will be greatest on community organizations that count on small, local donations and are now having trouble staying afloat or planning for the future.

“I know a lot of small organizations are nervous. It’s hard to know what kind of programs to offer,” said Eileen Heisman, president of the National Philanthropic Trust.

CHANGES AHEAD

While most Americans donate directly to their causes, a growing percentage use donor-advised funds, which are like brokerage accounts for charity, where the principal grows tax-free and grants can be made at any time.

These accounts are particularly efficient for those who want to donate appreciated stock or other non-cash assets, taking a tax deduction upfront and doling out the funds later. Organizations like Fidelity Charitable and Schwab Charitable administer these accounts and manage the granting process.

Granting may be higher in 2019 because the stock market, while volatile, is up over last year, said Fidelity’s Norley.

Also, some people may have made a larger-than-usual donation in 2018 or 2019 in order to push them over the standard deduction limit, and will skip a year or two later on – a strategy known as bunching. The way that worked for Heisman was that she did a back-of-envelope guess about how much she was going to be able to deduct at the end of last year.

“We were really close, so I said, I’m going to make an additional gift to our donor-advised fund that is guaranteed to push us over,” Heisman said.

Most people are still figuring out how tax law changes are impacting their finances, so it could take up to three years before this factor settles down, said Heisman.

More troubling in the long-term may be the wealth effect that is starting to show in philanthropic data. Wealthy people are giving more to charity, but middle- and lower-income people are not giving as much as they used to, according to Giving USA, an annual report that tracks philanthropy.

Tax incentives are only part of this, with the overall economy and demographic changes also playing a part, said Una Osili, associate dean for research at Lily Family School of Philanthropy and a lead researcher of the annual Giving USA report.

“Those who are giving are wealthier, but there is less giving and less participation among lower- and middle-income and younger donors,” said Osili.

Donors, especially young ones, are also changing their giving behavior, and the traditional data-gathering of organizations like Giving USA may not be capturing all the activity that is now going on.

In particular, giving to individuals, such as through GoFundMe campaigns, is not tracked because these funds do not go to registered charities. Political donations are also not counted because these are not technically charities.

In addition, impact investing and socially conscious consumer behavior do not figure in as charitable giving, although many people associate the behavior as for a social good.

“Right now, the definition of charitable giving is quite specific. But because the boundaries are getting blurry, the question is: ‘how large is the pie?’” said Osili.

(Company clarifies, in paragraph six, that incoming donations were down 1.1% nationwide; earlier wording didn’t specify that the drop was nationwide)