Giving with Impact:

[Michael Gordon Voss] Welcome to Giving with Impact, an original podcast series from Stanford Social Innovation Review developed with the support of Schwab Charitable. I'm your host Michael Gordon Voss, publisher of SSIR. In this series we hope to create a collaborative space for leading voices from across the philanthropic ecosystem to engage in both aspirational and practical conversations around relevant topics at the heart of achieving more effective philanthropy.

The Tax Cuts and Jobs Act of 2017, or TCJA, made reductions to income tax rates for most individual tax brackets. But it also made changes to itemized deductions, which caused many in the non-profit sector to worry that this might lead to a reduction in total charitable giving by individuals. Now that we've gone through more than a full year of this legislation being in effect, what does the data show? How do taxes, or the economy more broadly, impact philanthropic giving?

And what approaches should donors consider if they want to continue to give with impact?

To explore these issues, we're joined today by two individuals with extensive knowledge on the subjects of economics and taxes and how these relate to giving. Una Osili is a Ph.D. and Associate Dean for Research and International Programs at the Indiana University Lilly Family School of Philanthropy, the world's first school dedicated to increasing the understanding of philanthropy and improving its practice worldwide. An internationally recognized expert on economic development and philanthropy, Dr. Osili speaks across the globe on issues related to national and international trends in economics and philanthropy.

We're also joined by Hayden Adams. Hayden Adams is Director of Tax and Financial Planning at the Schwab Center for Financial Research. He's both a CPA and a certified financial planner, and prior to joining the center, served as Schwab's lead representative on tax regulatory matters, using his eight years of experience with the IRS.

Una, Hayden, thank you, both, for joining me today as we discuss giving and the economy. Let's get started.

Before we jump into specifics about the 2017 Tax Act and its effect, it might be helpful to do some level setting. Una, can you provide us with an overview of the economic and policy factors that affect philanthropy in the United States?

[Una Osili] Certainly, and thanks for having me on the podcast today. A number of factors in the economic and public policy environment influence charitable giving decisions. For example, individual giving is closely linked to personal income, as well as the performance of the stock market. In 2018, we had a number of complex factors that influenced the charitable giving climate. We had uneven growth among different segments of the philanthropic sector, as well as recovery from the recession three or four years ago has been uneven, with different subsectors and different donor groups experiencing overall various trends over time. We have spent the last several years really unpacking this data at an aggregate level, but also at a micro level, examining how American households across different income groups in different parts of the country have fared in this climate.

In 2018, we had an overall strong economy, which had a positive impact on giving, however, changes in tax policy and other policy changes may have also hampered charitable giving. And to look more closely at 2018, in 2018, personal income grew, however, the stock market experience declines in late 2018, which may have had a dampening effect on giving. And these factors were added to already a complex environment in 2018, due to the passage of the Tax Cuts and Jobs Act at the end of 2017.

[MGV] And Una, can you speak more specifically to the possible impact of the TCJA of 2017?

[UO] As most listeners know, the Tax Cuts and Jobs Act was passed at the end of 2017, in December, and changed incentives for American households starting in 2018. Prior to and since the passage of TCJA, researchers at the Lilly Family School have estimated that these policy changes could have had a negative impact on charitable giving. And how so? The TCJA reduced the incentives to give for individual taxpayers, and these policy changes, combined with the economic variables that I mentioned, influenced individual giving, which declined both in current dollars and inflation-adjusted dollars to reach $292 billion in 2018. While we know the tax benefits are not the primary reason that most individuals make charitable donations, research by our school and others indicate that tax benefits do, in fact, affect the amount that people give, the timing of their gift, and also the vehicle that they choose to make those gifts with.

[MGV] So, Hayden, what were the key changes in the Tax Cuts and Jobs Act that relate directly to charitable giving, and what were some that indirectly could have impacted giving, or could still impact giving?

[Hayden Adams] That's a great question. And, first of all, thanks for having me on your podcast, Michael, and it's great to be on here with Una.

There's been a lot of confusion around this because the changes that happened in the Tax Cuts and Job Act happened so quickly. In fact, most of the changes within the Tax Cuts and Jobs Act were actually positive. For example, they raised the AGI limitation, the adjusted gross income limitation, as to how much charitable donations you can make from 50% to 60%.

[MGV] And Hayden, what about the potential indirect impacts of the act?"

[HA] In the past, there weren't limits on the amount you could deduct when it came to state, local, property taxes, things of that nature. Now there's a $10,000 cap. You have to add up all those deductions and you're capped at $10,000. They also removed all the miscellaneous itemized deductions, and they put limits on the mortgage interest deduction. In the past, you could deduct up to a million dollars' worth of mortgage interest indebtedness. Now it's $750,000 of indebtedness.

Those changes, along with the standard deduction changes, impact how many people actually take the itemized deduction. And as you know, you don't get a charitable donation deduction unless you itemize.

And to put this in perspective for you, based on the changes within the Tax Cuts and Jobs Act, previously, about 30% of American taxpayers would take the itemized deduction and 70% would take the standard deduction. Now, because of all these changes that have occurred, we have only about 10% of the population who are going to itemize going forward.

[MGV] Una, taxpayers have now completed a full tax year after the passage of TCJA. Is there an indication that the current tax environment has had an effect on philanthropy in the US?

[UO] To be clear, the full picture of how taxpayers have responded to TCJA in 2018 is not fully known yet. Much of that data is still coming in and will continue to do so for the next two to five years. It's also important to note that taxpayers are also adapting their behavior in response to the policy shifts that we've experienced. And since some taxpayers are still learning how these changes will affect them personally, they will not fully know all of the ways that the new environment will affect them until they have filed their taxes for that particular year. This means that we are likely to see continued change in 2019 and beyond. The other side of this study is that we'll also need to fully understand whether households see these changes as temporary changes or permanent changes. In fact, we tend to see bigger responses when households perceive these to be more permanent changes to their incentives.

[MGV] Una, what do we know about how sensitive households are to these tax policies?

[UO] Well, good question. Researchers have been working on this for quite some time, attempting to understand how responsive donors are, not just to the most recent policy changes, but to changes in tax policy more generally. It all centers on one factor, what economists term elasticity, and that is the degree to which American households respond to changes in their tax incentives. There is some debate about how responsive donors are. In other words, do they give more when their tax incentives improve or does their behavior not change very much. And let me just share that these estimates do, in fact, vary depending on the assumptions that you make, but the consensus is that households do have some degree of responsiveness to changes in their tax policy. So there is some evidence of this sensitivity, you might call it, to the tax incentives that they face.

[MGV] Going back to something you mentioned before - " the idea that only 10% of households may now choose to itemize... What are some of the things (there is an errant "those" here, please remove) Americans should consider in order to maximize the benefits of their charitable giving?"

[HA] There are some great strategies you can use. For example, one of them, I like to call bunching donations. It's a great strategy because it can help you maximize your overall itemized deductions. And, basically, what you do is you bunch your donations, maybe one or two years into a single year, and then flip-flop between taking the itemized deduction and the standard deduction in the other years.

So an example of how this works. Let's say you've got a joint filer, a married couple, who normally make about $10,000 worth of charitable donations each year, and they also have $13,000 of itemized deductions, which gives them a total itemized deduction of $23,000. Well, in the past, they would always have itemized with $23,000 of itemized deductions. However, under the new tax law, they would end up taking the standard deduction because it actually has a bigger dollar amount. It's $24,400 for 2019, if they were to take those charitable donations, two or three years and bunch them into one year, what ends up happening is, is they can accumulate a very large itemized deduction in that first year that pushes them over that $24,400 limit, and then they end up itemizing and getting a fairly significant deduction. Then in the other years, they take the standard deduction.

So if they were to bunch two years of itemized deductions into a single year, they could potentially increase their overall tax benefits to $8,600. And that's because they'll get the itemized deduction one year, and then they don't donate the next year, and they get the standard deduction. If they did it for three years, that deduction could go up to as much as $18,000 worth of additional tax benefits.

[MGV] Can you share with us some other strategies in the current environment that can help donors both reduce their taxes, and, more importantly, give more to the causes that are most important to them?

[HA] That's an excellent question because there's one strategy that really stands out as a perfect example of this, and that's by giving appreciated assets. And what I mean by that is like, say, you've got some stocks that you purchased 20 years ago for $10,000, that's their cost basis, and over those 20 years, they've appreciated, and now they're worth $100,000.

So you purchased those assets originally for $10,000, they appreciated to $100,000. That's $90,000 of capital gain that would be taxed if you had sold the assets, then donated them. Whereas if you donated the actual stock to the charity, they get all the assets, all $100,000. You don't end up paying tax on the appreciation, that $90,000, but you do end up getting the $100,000 deduction. So it's kind of a win-win situation for both the charity and for you. You maximize your deduction, they maximize how much money they receive.

Now, unfortunately, not all charities are capable of receiving complex assets, like stocks, or property, or land, things of that nature. So this is another strategy where a donor-advised fund can be a very useful tool, because donor-advised funds are quite capable of accepting these more complex assets. So what you can do is donate that $100,000 to a donor-advised fund. Once the money is in the fund, you get the deduction for that $100,000 donation, and then begin donating or granting those assets to the various charities.

[MGV] Hayden, those solutions sound like they definitely benefit both the donor and the organizations they support, so thank you for sharing them.

Una, I think you know that, at SSIR, we're big fans of the work that the Lilly School does. And you, in fact, coauthored the recent cover article in SSIR, where data from the Lilly School addressed some broader learnings about philanthropy today, including giving as a percent of GDP. Can you speak to that and some of the other learnings that you have identified about philanthropy and giving in the United States?

[UO] Yes, thanks for that question. As you noted, giving as a share of GDP has remained relatively constant at 2%. However, over this time period, giving overall has grown. What has not been appreciated as much or recognized is how giving is changing, how philanthropy is changing. Today, people are giving through many new types of vehicles. They're also participating in investing in social enterprises, and perhaps giving through crowd-funding platform. And not all of that is being counted under philanthropy, which traditionally has been classified as giving to 501(c)(3) charities.

What we're seeing, through a wealth of research, is that the philanthropic sector is evolving. The biggest takeaway from our research is in this country, in the United States, we have a strong culture and tradition of philanthropy. Tax incentives, as we've noted, are rarely the sole motivation for giving, and the desire to help others to contribute to one's community are. And all of these pro-social motivations are much larger as a factor in why and how people give.

[MGV] As with the other episodes in the series, I usually like to end on a question about the future. So, Una, let me ask you to indulge me, and tell me what you think the future of giving might look like.

[UO] We've spent a lot of time, also, looking at what our current research tells us about the future of philanthropy. And by looking at historic moments that are similar to this particular one, we can begin to understand how all of these factors will affect our trajectory going forward. For example, in the 1980s, there were very significant changes in tax policy, and those policies were pretty much the opposite of what we're experiencing currently. The charitable deduction was temporarily extended to more Americans, and what we saw was a temporary uptick in giving in the 1980s. The Tax Reform Act that was enacted at the end of 2017, may have that opposite effect because it reduces the fraction of Americans who can benefit. But it's important to note that in addition to the tax reform, what also ultimately matters is that households have resources to give, and what's happening with their household incomes, and with the stock market. So, basically, both the real economy and the financial market in the context of aggregate charitable giving are likely to be more important.

So as we look to the future to a bit of a crystal ball and try to see what might take place, we need to look at all the factors that affect giving—tax policy, combined with the overall economic environment to get a picture of what you expect going forward.

[MGV] Hayden, given your direct contact with Schwab clients, what are your thoughts about giving in America today, and, potentially, in the future?

[HA] Well, taxes are just one of many considerations that people take into account when making the decision as to whether they want to give or not. Luckily, you know, we still have the charitable donation, and there are actually some changes that are very positive for it. But the reality is people don't give just to get a charitable deduction. They give because it's part of who they are. It's part of the goal of many people to help others, and America has a culture of giving. For example, back when 70% of the population tended to take the standard deduction, did that mean that that group of people wasn't giving? Not at all. Millions of people were giving, even though they weren't getting any tax benefit to it. So, yes, we have some changes that can indirectly impact charitable giving, but, overall, I'm very optimistic that people will continue to give because we just have a culture of that within this country.

[MGV] Well, I think that optimism of yours is very well-founded, and I like to share it, I think all three of us do. And I'd love to keep talking about this subject more with both of you, but, unfortunately, we've come to the end of our time today.

So, Una, Hayden, I'd like to thank you, both, for joining me. I know we've only scratched the surface on this, but maybe that means we can sit down again and explore the topic further at some point.

[UO] Oh, thank you. Yeah. Thank you for having us.

[HA] Thanks, again, for having me on the show, Michael.

[MGV] Thank you for listening. We hope you've enjoyed this episode. Please consider leaving us a review on Apple podcast or your favorite listening app as it helps others discover the show. We encourage you to listen to other episodes in this series, as well as other podcasts from SSIR, Schwab Charitable, and Charles Schwab. This podcast series is made possible with the support of Schwab Charitable, who played an important role in the selection of topics and speakers. For important disclosures and a transcript of this episode, visit schwabcharitable.org/impactpodcast.

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