Are you Bunching this year?

How to make sure the new tax law doesn’t reduce charitable giving by $20 billion this year

By Michael Frohna, CFRE, President, Junior Achievement of Wisconsin, AFPSEWI Board member

“Bunching” does not refer to binge-watching episodes of the 1970s classic The Brady Bunch; rather it’s a term being associated with charitable giving amid the tax reform act passed in late 2017.

My qualifications (using the term loosely) to write this article stem more from intrigue about the new tax law’s impact on charitable giving than it does from professional expertise.  I am not a licensed tax advisor nor should this piece be constituted as tax advice for you or any of your donors.  My thinking on this issue was expanded in large part by information shared by the Indiana University Lilly School of Philanthropy and content found on Fidelitycharitable.org (which I encourage you to visit).

On to bunching…

Bunching is a taxpayer strategy of combining two or more years of qualified tax deductions into a single calendar year so that deductions meet and exceed the new standard deduction minimum threshold ($12,000 for individuals; $24,000 for married couples filing jointly) and thereby result in greater tax savings. While taxpayers may have fixed deductions such as mortgage interest or state income taxes, they will almost always bunch philanthropy because the amount and timing of giving is more controllable than these other eligible deductions. 

Academic experts at the Indiana University Lilly Family School of Philanthropy projected that because of the new tax law Americans would give $20 billion less in 2018 than the $300 billion they gave in 2017.

As fundraising professionals, we are an optimistic lot -- which is why it’s not surprising that some in our field have already denied these projections and claimed victory over the new tax laws.  But their evidence was based upon late 2018 and early 2019 random surveys of non-profit leaders who used 2018 campaign results to assess the impact of the new laws. This is hardly a good litmus test.  While it may be true that the year ended and started well, donors had yet to complete their taxes.  New realities set in when donors experienced the impact of the new limits on deductible expenses, which likely resulted in reduced or no refunds -- or worse, a tax liability.

Taxpayers who experienced this effect in 2018 might hesitate to give as generously as this year, because many are now undecided about whether they will itemize this year.  Fidelity Charitable says 20% of taxpayers – about 7.4 million households -- are on this fence. 

This new reality will undoubtedly influence charitable giving -- if we let it.

The jury is still out on the law’s true impact on charitable giving decisions. Whether giving diminishes, stagnates, or increases doesn’t depend on the new tax laws only, but on our response as fundraisers.  Rather than taking a wait-to-see mentality, it’s worthwhile to consider new ways of increasing support for your organization.

Three strong possibilities:

1. Activate year-end giving plans now:  Because a household may use their charitable gifts as a way to directly impact what we cannot control—their annual tax consequence—nonprofit organizations should activate year-end giving plans now. Don’t wait to inform donors until October or November what you are doing to try to help them maximize their deductions. Examples include providing an overview of how bunching would work with your organization, getting a tax expert from your board or the community to depict the benefits of bunching scenario for publication on your website, or create links to share on social media that inform donors how to bunch.
    
2. Set up “bunched gift” restricted funds:  Work with your finance leader and board to ensure you have set up temporary restricted funds where “bunched gifts” will be held for subsequent operating years.  Simple example:  Donor Joe and Jane typically make a $1,000 annual gift.  In 2019 they make a bunched gift of $3,000, which they expect the nonprofit to allot as $1,000 per year in 2019, 2020 and 2021.  This means they may not be open to other gift requests until 2022!  Don’t fret. Use the “extra time” to increase your stewardship efforts with them, keeping them close as though they were still giving annually (because they really are).
    
3. Revise your plan and sharpen your case for support:  Use the new tax laws as a reason to develop or refine your three-year budget projection, fundraising plan, and case for support.  Sure, we generally hold sacred the idea that tax deductions are much less motivating to donors than an organization’s mission and their trust in its leadership, but bolstering your case for support can refocus donors’ decision-making on your mission and less on new tax codes.

Overall, as fundraising professionals we are perfectly positioned to structure our programs in order to influence giving decisions. Building our organizational infrastructure to promote and support bunching will be vital to maintaining or increasing giving to our organizations.   Welcome to the new world of charitable giving, circa tax law 2017…