Tax law changes recently proposed by the Biden administration have made the near-term implications of charitable donations unclear for nonprofits and their donor organizations. But tax turmoil like this is not new. In fact, the past two decades have seen four of the five biggest tax cuts in U.S. history. What’s more, regardless of what eventually becomes law as a result of the Biden tax policy, taxpayers will face another round of turbulence in the runup to 2026, when many provisions of the Tax Cuts and Jobs Act of 2017 are set to expire.
Periods of uncertainty, whether they come in the form of tax law changes or global pandemics, impact what, when and how much donors give, and can even cause donors to reevaluate their giving strategy. So, how can charitable organizations steward their major donors through these rough patches?
Here are five steps nonprofits can take to enhance donations even when the tax outlook is murky.
1. Understand What’s Driving Your Major Donors and Planned Giving Prospects
Fundraising is all about relationships, and relationships are built on collecting and leveraging information. You have to ask the right questions, and the most important question you can ask a major donor or planned giving prospect is, “What are you hoping to get out of your relationship with us?” The answer to that question should be a key element in your donor segmentation, as it’s essential to tailoring your stewardship approach, particularly when it comes to managing major donors through turbulent times that might reduce or delay their charitable contributions.
People and organizations give to charity for a variety of reasons that fall within the spectrum between “purely for their own benefit” and “purely for the benefit of others.” Nonprofits need to understand where on that spectrum each of their major donors lies.
Is donor X giving mainly for the tax benefits or because they’re passionate about your cause and want to see the impact their gift will make on specific programs? The answer to that question will dictate the frequency, type and goal of your outreach to said donor. A donor organization that gives primarily for altruistic or reputational reasons, or that indirectly benefits from the nonprofit’s mission (for example, supporting educational initiatives focused on the sector in which the donor operates) may not be as interested in the minutiae of tax changes. For these supporters, a little information about proposed changes will go a long way.
Donors who are motivated to give mainly for tax benefits will need more handholding, especially if their charitable giving comes in more complicated forms like highly appreciated securities or donor-advised funds.
2. Start Your Outreach at the Top of the Donor Pyramid
Whenever the potential for changes to tax laws arise, the first step in your outreach strategy should be to review pending plans and gifts. From there, reach out to current and prospective donors who are likely to give but may not have committed yet. Start at the top of your donor pyramid with planned givers and work down through your major donors. According to the Fundraising Effectiveness Project’s (FEP) Quarterly Fundraising Report for Q3 2021, donors contributing $5,000 or more annually made up only 1.8% of total donors but were responsible for over 72% of total dollars donated. This group of donors is also more likely to factor potential tax changes into their decision-making.
Use these tax proposals as a “touchpoint” to connect with planned gift and major donors to demonstrate that you understand the potential impact of any proposed changes and are committed to a charitable giving strategy that’s right for them.
3. Assess Gift Types and Timing
In addition to understanding why your donors are giving to your organization, your communication also needs to take into account what they’re giving. Gift types will be impacted differently by changes to tax law, and donors will need to balance the timing each gift type requires with the proposed timeline for the changes. Some donors may be tempted to “wait and see” whether and how tax proposals work their way through the legislative process. However, nonprofits need to warn their donors not to leave their contributions until the last minute, especially in the case of complicated donation schemes that take time to prepare and execute, like donor-advised funds. While the gifting of cash can be quick and straightforward, noncash gifts of capital assets, or stock, or incorporating vehicles such as charitable remainder trusts and donor-advised funds can be more complex and time-consuming.
4. Challenge Preconceived Notions
Just like the rest of us, philanthropists may have preconceived notions about the potential impact of changes to tax law based on who is proposing them. A donor’s initial reaction to the prospect of higher tax rates might be to pull back on charitable giving, so it’s your job to point out that doing so might not be in their best interests. For example, the increased tax rates proposed by the Biden administration could increase the value of the tax deduction for charitable contributions, incentivizing donors to give more than they would otherwise. The same could be said about the proposed increase in the capital gains tax rate, which would be a boon to donors contributing long-term appreciated securities to charity.
5. Drive Home the Impact
Finally, remember to take time in your donor outreach to drive home the impact their gifts will have. How is the donation essential in the current and near-term climate, and how might a decrease in giving impact your programs and mission? Be sure to pair that last point with details on how your organization is preparing for the changes and moving to mitigate any potential negative impacts. Your donors should understand that their gift is needed now more than ever, without raising concerns about your organization’s leadership or solvency.
And keep in mind that, for donors who skew more toward the altruistic end of the motivation spectrum, the threat of donation shortfalls resulting from potential tax law changes may be a potent tool to encourage increased giving.
Changes to the tax environment can be frustrating and confusing—but with the right strategy, strong donor relationships and a proactive approach, nonprofits can enhance donations despite the uncertainty. It’s imperative that nonprofits understand the likely impact of tax changes on both their mission and on donors, and also what’s driving donors on an individual basis. Armed with this information, nonprofits can create a strategy to help them steward donors through periods of uncertainty.
Cynthia J. McDonald, CTFA, is national director of philanthropic advice at KeyBank Institutional Advisors.
Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice. This material is presented for informational purposes only and should not be construed as individual tax or financial advice. KeyBank does not provide legal advice. KeyBank is Member FDIC. KeyCorp. © 2022
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