In 2020, we saw nonprofit organizations push forward through the unknown and find unique ways to stay alive during a pandemic. While in-person events dwindled to basically nothing, and earned income dwindled in many sectors, we saw great ingenuity and creativity in the virtual space. While many worried about the rate of donations, the nation as a whole saw an increase. According to the Association of Fundraising Professionals, overall giving increased by 10.6% in 2020 as compared to 2019.
This increase may be partially attributed to the tax provisions included in the CARES Act that we discussed last year in the blog post below. Another stimulus package was signed in December of 2020, extending some of the charitable tax provisions, but also providing some additional ones.
So What’s New?
- For those not itemizing, the CARES Act allowed for an above-the-line charitable deduction of $300 for individuals and households ($300 total) in 2020. In 2021, joint filers (not itemizing) are allowed an above-the-line deduction of up to $600 for charitable contributions ($300 each).
What’s the same as 2020?
- An increase in the federal income tax deduction for charitable contributions made in 2020 from 60% to 100% of adjusted gross income (AGI).
- An increase in the deduction for charitable contributions by a corporation from 10% to 25% of taxable income.
Read the post below to learn more about how nonprofits can benefit from these extended and revised provisions.
In the current crisis, nonprofits have been forced to seek out any and every avenue to keep the lights on, including making painful cuts and experimenting with new sources of revenue. Organizations that have relied largely on a single source of revenue, such as services that they can no longer deliver or government funding that has been reduced, are having to get creative about how they make up the shortfall. And when difficult decisions about cutting even the smallest expenses are being made, no opportunity can be overlooked. One opportunity that nonprofits should pay attention to right now and incorporate into their plans for 2020 are the tax provisions included in the CARES Act.
Tax Changes for 2020 Charitable Giving
Understandably, much of the focus around the CARES Act as it relates to nonprofits has been on the Paycheck Protection Program (PPP) and the Emergency Injury Disaster Loans (EIDL), which provide assistance in the form of grants and loans. However, while those programs offer much-needed immediate and direct relief to nonprofits, they don’t replace the sustained funding provided by ongoing contributions. The additional tax changes included in the CARES Act help address this part of the equation by incentivizing giving.
Specifically, the CARES Act tax provisions include:
- An increase in the federal income tax deduction for charitable contributions made in 2020 from 60% to 100% of adjusted gross income (AGI)
- An increase in the deduction for charitable contributions by a corporation from 10% to 25% of taxable income
- An increase in the amount of the allowed deduction for food donations from 15% percent to 25% percent
- An above-the-line charitable deduction of $300 for individuals (also limited to $300 for married couples filing jointly) that take the standard deduction
A key feature of these new provisions is that they are limited to cash donations in 2020 given directly to nonprofits, rather than private foundations or Donor Advised Funds. In a previous post, we mentioned that while Donor Advised Funds (DAF) may encourage overall contributions, they do not have any requirements to distribute those funds within a specific timeframe. By comparison, the temporary allowances in the CARES Act incentivize giving more now when nonprofits can benefit the most.
Another important benefit of these provisions is the deduction allowance for individuals and married couples that don’t typically itemize. The introduction of the 2017 Tax Cuts and Jobs Act, which nearly doubled the standard deduction amount, meant fewer people would itemize charitable contributions. Ultimately, this led to a significant decline in gifts to nonprofits, especially among modest gifts (under $250). With the 2020 rules in place, there is an opportunity for nonprofits to re-engage this segment of their donorbase.
How Can Nonprofits Benefit?
How can nonprofits turn this benefit directed at donors to help their own bottom line? Here are a couple ways your organization can start to leverage these new tax rules to your advantage.
Educate Your Constituents
Much of your donorbase may not even be aware of these changes. At a time when everyone is focused on their own financial well-being or the stock market’s performance, it’s understandable that they may not be up-to-speed on the details. This is especially true of folks that have stopped itemizing deductions. Your first step should be to educate your donors about the advantages of making a contribution now. Here’s a great example from Make-A-Wish, of an accessible resource page which makes it easy for potential donors to understand the new rules in detail, explains exactly how to take advantage of the tax benefits, and invites visitors to engage their team directly for guidance.
Reinforce the Message
Many organizations are getting creative with their fundraising; symphonies are hosting musical marathon fundraisers, musicians are selling future experiences, and zoos are extending their membership periods to secure renewals now. It’s easy for a single communication about tax deductions to get buried under this flurry of campaign activity. As you promote your fundraising activities, make sure to include information about the new tax benefits. Repeating the message across multiple channels on a regular basis can help break through the noise and nudge readers to give now instead of postponing.
Understand Your Audience
The new tax breaks for 2020 incentivize giving across the board: corporations, high-net-worth individuals, and households that take the standard deduction. It’s important to understand to which group each of your constituents belongs and deliver a message that’s aligned to their interests (note: to learn more about wealth screening and get a free analysis of your database visit analytics.windfalldata.com).
For example, many organizations are naturally focusing on securing larger gifts from existing high-net-worth donors. These individuals are likely already taking a deduction on any charitable contributions they make or may be making contributions via a Donor Advised Fund. Educating these donors as you launch your online fundraising auction on the significant benefits of giving directly may go a long way to increase participation in your event and overall gift size. Additionally, many of your wealthier donors may be small business owners. Armed with this information, your frontline development team could potentially increase the impact to your organization by soliciting corporate giving from the same individuals.
With lower-amount donors, there is an opportunity to re-engage individuals and households whose giving may have lapsed when the standard deduction was raised. With the new deduction allowance, that modest $200 donation to an organization in need now looks like a no-brainer. Also with updated net-worth data, you may find that since you last engaged, their wealth has increased enough to solicit an even larger donation.
However you incorporate these new tax provisions into your fundraising strategy, the key is to act now. There is no indication whether these benefits will be extended beyond 2020. Of course most of your most ardent patrons will not be wholly motivated by tax breaks, but every bit counts!
Interested in learning how Windfall’s can help you identify, segment, and engage with your most affluent donors and prospects?