The Fiscal Cliff: What Nonprofits Need to Know

With the country inching ever-closer to the edge of the fiscal cliff, policymakers are discussing a number of proposals that are bound to impact nonprofit organizations’ ability to raise funds in the coming year.

Due to the great uncertainty around taxes for next year, charities should consider contacting donors to make gifts now when they know how a charitable donation will be treated.

There are various scenarios that could impact charitable giving, including increasing or decreasing tax rates, lowering the value of charitable deductions, changing deductions to tax credits or the adding of a floor before any charitable donations could be deducted.

For example, if charitable deductions would have to exceed a “floor” of 2 percent of adjusted gross income (AGI) before a donor could deduct a contribution, a family with $100,000 AGI would have to give $2,000 before they could deduct $1 as a charitable contribution.

On the other hand, if tax rates go up, donors with an increased tax rate could deduct more—e.g., for every dollar given to a charity—the donor could deduct up to 39.6 cents, whereas this year a donor in the top bracket could only deduct 35 cents. If that were the only issue in play, then the wealthy could be advised to consider deferring contributions until next year.

However, that is not the only issue in play. Other proposals would limit or cap the value of the charitable deduction to 28 percent, which would mean that even if a donor is in the 35 percent tax bracket, only 28 cents of every charitable contribution dollar would be deductible. Additional proposals would cap total itemized deductions at a fixed dollar amount.

Currently, favorable rules under the tax laws allow a donor to make gifts to charities of appreciated stock in 2012. In general, if stock is given to a charity there is no tax on the gain and donors can claim a deduction for the full fair market value. Again, tax rules could be changed in the future

In summary, as charities make one final push to end 2012 on a high note, they should keep the following considerations in mind:
  • Encourage donors to make gifts now, while the tax outcome is certain, rather than waiting until next year when the rules may be changed.
  • Continue to make appeals to existing donors, but a big effort should be made to reach out to new donors.
  • Convey a compelling mission. There is enormous competition for charitable donations; making an organization’s mission emotionally compelling and relevant is key because now is the time to take advantage of favorable giving arrangements.