New Tax Bracket Information Released for 2025

The IRS has released the new tax brackets for 2025, and much of this information will be important to your donors.

Under current laws, many important tax items — such as the standard deduction — are now indexed for inflation. Each year, the Internal Revenue Service looks at the rate of inflation and adjusts several key numbers accordingly.

Importantly, for 2025 the Standard Deduction will rise to $30,000 for a married couple filing jointly, and $15,000 for a single individual. That means that if the taxpayer has deductions — such as charitable gifts, mortgage interest as well as state and local taxes — below that amount, they will take the standard deduction.

Taxpayers taking the standard deduction cannot deduct charitable gifts. In 2023, the Congressional Budget Office (CBO) estimates that around 87% of households took the standard deduction.

Also, The federal estate-tax exclusion amount—how much an individual can shelter from estate taxes—is $13.99 million for deaths in 2025, up from $13.61 million this year. (The deduction for a married couple will be twice that amount — or $27.98 million.) Individuals can make lifetime gifts, outright or in irrevocable trusts, up to that amount without incurring federal estate or gift tax.

A common estate planning strategy is to give assets up to the exclusion amount to your family, and give the rest to charity. With such a high threshold, very few households will leave a charitable bequest using this strategy.

Not all important tax items get inflation adjustments. The $10,000 cap for deducting state and local taxes, known as the SALT break, is not adjusted for inflation. This is an important limitation, because if that cap is removed many more households would have a much higher level of deductions and, therefore, would itemize. The CBO estimates that an additional 10% to 15% of all households (depending on the state they live in) would itemize if the $10,000 limit was removed.

Community Foundations, Hodding Carter, and the Best Advice I Ever Got

Hodding Carter III died last week.

For those of you who don’t know that name, Hodding Carter served as President Jimmy Carter’s (no relation) press secretary. He became the face of the administration when he gave daily press briefings during the Iranian hostage crisis, which lasted 444 days.

Carter’s family owned the Greenville Delta Democrat-Times, a newspaper published in Greenville, Mississippi, that became a vocal critic of the segregationist policies that prevailed in Southern states in the twentieth century. (As an aside, I am old enough to remember eating lunch in the “whites only” room in a restaurant in Lexington, Kentucky).

Partly due to Hodding Carter’s background in journalism, in 1998 he was named the President of the Knight Foundation. It was in that role that I met Hodding. A group of community foundation leaders had been invited to dinner in Miami to discuss the Knight Foundation’s program to support community foundations. At some point during the dinner, someone asked him if he could offer any advice.

“Remember,” he said, “Just because you lead an organization that has a bank account balance with lots of zeros at the end doesn’t mean you are the smartest guy in the room.”

“The problem with many foundation leaders I have met”, he went on, “Is that that someone put them on third base, and they think they hit a triple”.

The comment hit home for me. I was not yet 40 when I was named the Executive Director of our local community foundation. I was thrilled to lead one of the largest foundations in our community – and in our state – and I spent my first few years thinking I was a five-star general in charge of an army. Too many times, I acted like our Foundation was going to be the savior that solved every problem. I talked too much and listened too little.

But I came to realize that I was only one part of a complex charitable ecosystem, and it was the charities we supported who were doing the heavy lifting. And I was only a temporary steward of our foundation’s assets. My model became more like a servant leader: Embracing humility, listening, trusting, valuing people … and caring. I hope that I took his words to heart and used it to guide my behavior in the decades that have passed since that fateful dinner.

Thank you, Hodding Carter, for your insightful advice. Your wisdom and leadership will be missed.

The Five Strategic Pillars of Community Foundation Success

Community foundations are complex organizations, so it’s critical that they have a clear strategic direction to focus their time and energy on their most important goals.

While community foundation strategic plans can vary substantially, for most their strategic goals are going to fall into one of five categories.

  • Efficient and effective internal operations

  • Fair and unbiased awarding of grants and scholarships

  • Widespread awareness and understanding

  • Successful fund development

  • Strong community leadership

Successful community foundations perform well in each of these strategic areas. 

At the most basic level, good community foundations develop and manage efficient and effective internal operations.  In a successful organization, qualified staff is recruited and trained to perform well, internal processes run smoothly, and staff works as a well-functioning team.

All community foundations need to have in place a fair and unbiased program for awarding grants and scholarships.  This function is critically important and will drive the attitudes of your key stakeholders – community leaders, nonprofit organizations, and donors.  A well-understood – and easily accessible -- program for awarding grants and scholarship will help you build the trust you need for long-term success.

Also important to your success is a widespread level of awareness and understanding in the community you serve.  Most community foundations describe themselves as “the best-kept secret in town” – but that is not where you want to be.  To garner the level of trust you need to serve your community your foundation must be well-known and well-understood. 

Critical to achieving your mission is successful fund development.  Foundations which attract new funds, and gifts to existing funds, do two things very well:  Tell great stories and build strong relationships.  You have plenty of wonderful stories to tell:  a grant that helped a local charity, or a scholarship that contributed to the success of a student.  Tell those stories with passion and enthusiasm. 

You will attract more gifts by building strong relationships.  Keep in mind that the key to your future growth will be donors who give a portion of their life savings to your community foundation.  For a donor to do that, they need to know you and trust you – and you can build that trust with strong relationships.

The ultimate goal of any community foundation is strong community leadership.  This leadership can take many forms:  assistance for nonprofits, supporting an important community project, or bringing groups together to discuss important community issues, to name just a few examples.  When you help to garner community resources to address a critical issue, you improve the quality of life for those you serve.

It may help to think of the five categories of strategic goals as a pyramid – one in which each level of the base must be in place before moving on to the next level. 

Every community foundation should have the goals in place for efficient and effective internal operations and a fair and unbiased grant and scholarship program.  When those goals are in place, efforts can be made at the next level — to ensure widespread awareness and understanding, along with successful fund development.

The top of the pyramid – after the other goals are in place – is strong community leadership.  While this is an area where most community foundations (and their board members) want to spend the most time, it is important the other pillars of strategic goals are functioning well.

Community foundations are complex organizations which can and do pursue many important goals.  A well-crafted strategic plan, which can guide your operations, can help you best serve your community.

Investment Returns in 2022 - Four Difficult Conversations You Will Face

The year 2022 is shaping up to be a difficult one for community foundation investment returns.  While daily swings of several hundred points are becoming common, stock market indices are down substantially year to date.

The S&P 500 fell 8.8% in April and is now down 13% since the start of the year. The Nasdaq index — which includes many popular technology stocks — fell 13% in April and has fallen 21% since January 1. For the Nasdaq, that is the worst start to a year since the index was created in 1985.

For community foundation leaders, these results will mean that you will likely facedifficult conversations with your key stakeholders.  But, as Douglas Adams said in The Hitchhiker’s Guide to the Galaxy, “Don’t Panic”.  Remember, a community foundation has a long time horizon – as we like to say, our time horizon is forever. 

So, keep that in mind as you get ready for these difficult conversations.

Conversation #1:  Your Board Members – It’s important to make sure your board is fully aware of your negative invetment returns, and their consequences.  If stocks don’t rally by the end of 2022, in the future you will have less money to award as grants and scholarships.  And your administrative fees will probably be below what you projected.  Be prepared to have a frank discussion with your board members on these matters.

Conversation #2: Your Investment Committee Members – As you are aware, the Uniform Prudent Management of Institutional Funds Act (UPMIFA) allows endowments to spend from “underwater” endowment funds (which can happen when stock prices fall), so long as the spending is “prudent”.   But a significant decline in stock prices could lead to a change in your spending policy.

Because of 2022’s poor investment results, you will likely have a difficult conversation in determining whether to lower the payout rate for 2023.  A lower spending rate will mean less to distribute in grants and scholarships.

One item on the table for your next investment committee meeting might also be the possibility of “rebalancing” — selling bonds, for example, and buying stocks to bring your investments closer to their target asset allocation levels.

Conversation #3: Grant Recipients – Your spending on grants and scholarships could decline in 2023 due, first, to a lower spending policy and, second, to a decline in the value of your endowment assets.   Charities that receive annual support from you – such as from a designated fund – may receive less next year.

You may have a spending policy that minimizes the reduction of payouts in any one year by, say, using a 12-quarter rolling average to determine the endowment base.  This will muffle the effects for 2023 – but will also mean the asset decline could be felt for at least the next three years. Make sure charities know that a payout decline might be coming so that they have time to prepare.

Conversation #4 – Your Donors:   You will be talking with your donors about several consequences of declining stock prices.  First, they may have created a fund with your foundation that will experience negative investment returns.  Second, they may be planning on making a gift using appreciated securities – and now the appreciation on those securities is a lot less.

What’s the common thread in each of these conversations?  It’s that a community foundation invests for the long term, and that short-term market declines are to be expected.  In my twenty-two years at a community foundation, I lived through the economic crisis of 2008-09, and watched the dot com bubble burst in 2000.  I even remember a Monday in October of 1987 when the stock market fell 25% in one hour.

Each of these declines seemed horrendous at the time.  But every time, the stock market bounced back.  This decline will, likely, be no different.

You can minimize the anxiety by having these conversations with your board, your investment committee, the charities you support, and your donors.  Take a long view and remember that temporary declines are just part of the cycle of long-term investment performance.  Perhaps you could even share this viewpoint over a calming cup of tea.  As the hero of The Hitchhiker’s Guide, Arthur Dent, is fond of saying, “A good cup of tea makes everything better”.

House Approves SECURE 2.0 Which Could Change Qualified Charitable Distributions

The House of Representatives recently approved HR 2954, the "Securing a Strong Retirement Act of 2022," which could make significant changes to a popular charitable giving vehicle, the Qualified Charitable Distribution (QCD).

A QCD is a direct transfer of funds from an Individual Retirement Account (IRA) that can be counted toward satisfying a donor’s required minimum distributions (RMD) for the year, as long as certain rules are met.

Significant changes include:

• Raising the minimum age at which a donor must begin taking the RMD from the current age of 72 to age 75 (phased in over time). Note that while the minimum age for the RMD would rise, the eligible age for a QCD would remain at 70 ½.

• Currently, an individual donor can contribute up to $100,000 per year in QCDs, as long as that individual is 70½ years old or older. For married couples, each spouse can make QCDs up to the $100,000 limit for a potential total of $200,000. In this legislation, this limit would be indexed for inflation and would increase each year.

• In an interesting twist, HR 2954 would allow a one-time QCD transfer of up to $50,000 to a charitable gift annuity or charitable remainder trust.

This last provision — the ability to fund an income-producing product using a QCD transfer — could be a very popular option for donors. It could mean — depending on how the rules are written — that a donor could take a tax-free distribution from an IRA and, in return, get guaranteed income for the rest of their life (some of which might even be tax-free). The community foundation field will want to keep a close eye on the progress of this provision.

Keep in mind that HR 2954 is a long way from passage … it will still need to be approved by the US Senate and then signed by the President.

Small Boost in Charitable Giving from CARES Act for Community Foundations

Our survey of 112 community foundations shows only a modest rise in charitable giving due to the new $300 “universal deduction” created by the Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act, The Act created a new $300 deduction from federal taxable income for donors who do not itemize on their tax return. Only 22% of the 112 community foundations surveyed indicated they had received a gift under this provision, while 68% thought they had not. An additional 10% did not know (as donations received may not indicate the donor was taking advantage of this new law).

Documentation of the new gifts remains uncertain. While the $300 universal deduction is not available for a gift to a donor advised fund, we found that only 5% of community foundations had changed the tax documentation to their donors. For those that had changed their gift receipts, here is typical language: “Thank you so much for your gift to the XYZ Fund. The XYZ Fund is a Donor Advised Fund, held at the Community Foundation.”

Are you required to change the tax receipt for a gift donation under the CARES Act? At this point, the answer is “No”, as the current official guidance from the IRS does not require a statement that the gift went to a donor advised fund. The Internal Revenue Service certainly has it’s hand full keeping their operations going during the pandemic, so it is no surprise that they have not released new guidance on changes to tax receipt documentation. Don’t be surprised, however, if at some point new documentation requirements are issued relative to gifts to donor advised funds.

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Rules Regarding Qualified Charitable Distributions Keep Changing

The rules regarding Qualified Charitable Distributions (QCD) keep changing – and it can be hard for your donors to understand this popular giving vehicle.

As you know, a QCD is a direct transfer of funds from an IRA account to a qualified charity. The donor does not get a charitable deduction for the amount given, but they also do not need to count the distribution as taxable income.  Importantly, the distribution can be counted toward satisfying a taxpayers required minimum distribution (RMD) for the year.

But two important pieces of legislation have recently changed these rules.

First, in the new fiscal stimulus bill recently signed into law, the required minimum distribution requirements have been suspended for 2020.  This does not prevent a donor from making a gift of a QCD to a charity; it means that the QCD will not be used to satisfy the RMD requirements, because there is no RMD requirement for 2020.

Even before the stimulus bill was passed, however, the Setting Every Community Up for Retirement Enhancement (SECURE) Act, approved in 2019, made significant changes to the laws regarding RMDs and QCDs.  With the passage of the Secure Act, the minimum age to start taking an RMD was raised from 70 ½ to 72.  The new law did not change the minimum age to give a QCD; the QCD minimum age remains at 70 ½. However, since a taxpayer does not have an RMD at that age, they cannot offset any RMD. But the donor can still give up to $100,000 from the IRA to a charity and not have the distribution included in taxable income.

So, let’s say you turn 72 in October of 2022. You could take a QCD at any point in 2022 and offset the RMD that is owed in 2022 from an IRA. To do a QCD, you do not have to wait until you reach age 72 – the only requirement is that the QCD be made in the same calendar year in which you turn 72.

Now comes the trickier part of the Secure Act’s impact on QCDs. The Secure Act also removed the 70½ age limit on contributing to an IRA. As such, those that keep having earned income past age 70½ can continue to contribute to IRAs and deduct their IRA contributions. In 2020, a taxpayer can contribute up to $7,000 a year if they are over 70½ and if they have at least $7,000 of taxable compensation that year.

But for taxpayers who put money into an IRA after age 70 ½, the rules for a QCD get complicated.  There is an “anti-abuse” clause which means that any QCD amount will be first reduced by the cumulative amount of post-70½ deductible contributions the taxpayer takes for an IRA that have not already been used to reduce a QCD amount.

OK, so what does this mean?  Suppose one of your donors puts $7,000 into an IRA when they are 72, and another $7,000 in the year they turn age 73.  In the year they turn 74, they don’t put any more money into their IRA; rather, they want to make a $20,000 QCD contribution to a fund at your community foundation.

Of the $20,000 QCD, $14,000 will be treated as a taxable distribution from their IRA.  This is the cumulative amount they deducted from their income after they reached the age of 70 ½. The $14,000 can be deducted as a charitable deduction (if they itemize), but they would also have to include the $14,000 as taxable income.  The remaining amount -- $6,000 – would be treated like a normal QCD, in that it cannot be deducted as a charitable deduction, it is not counted as income, and it can be used to offset any RMD requirement.

As you can see, the QCD rules have all of a sudden become more complicated – and that will not be good for the future of this very popular giving vehicle.

Stimulus Bill Has Important Tax Provisions

On March 27, the President signed into law the Coronavirus Aid, Relief and Economic Security (CARES) Act. Details are still a bit unclear, but here is what we know up to now.

First, there will be a new “above the line” charitable deduction of up to $300 ($600 for a married couple filing jointly). The phrase “above the line” means that a taxpayer can deduct charitable gifts up to $300 even if they don’t itemize their charitable deductions. This is important, because after the passage of tax reform in 2019, only about 10% of Americans itemize their taxes. The new law would allow them to deduct up to $300 from their taxable income. Importantly, what we have read so far indicates that those who itemize won’t get the $300 above the line charitable deduction.

The $300 charitable deduction is available only for cash gifts to public charities — but gifts to donor advised funds do not qualify.

In addition, for 2020, the income limit for cash contributions to charity rises to 100% of income (from the current 60% limit). As with current law, any cash gifts in excess of that limit can be carried forward to the next year. Also, cash gifts to donor advised funds do not qualify for the 100% income limitation.

Another important provision is the repeal of required minimum distributions (RMD) for 2020. This is important because donors can use a Qualified Charitable Deduction (QCD) to make a gift to charity to satisfy their RMD requirement. For 2020, no one will be subject to the RMD requirement — though they can still, if they wish, make a QCD gift.

Finally, for taxes due for 2019, the tax filing deadline has been moved to July 15, 2020.

These items are changing raplidly, and we will post additional information as it becomes available.

New Legislation Will Impact Community Foundations

The new federal spending bill signed by President Trump on December 20 contains some provisions of importance to community foundations.  And, as usual, it may be some time before we have a clear understanding of just what the new laws mean.

First, as part of legislation referred to as the Setting Every Community Up for Retirement Enhancement (SECURE) Act, the minimum age at which an IRA account holder must begin taking annual distributions will increase.  This might also increase the age at which a donor is eligible to take a Qualified Charitable Distribution (QCD).

Previously, the owner of an IRA was required to begin taking a RMD in the year in which they turned age 70 ½.  Effective January 1, 2020, the RMD age increases to age 72.  This also might mean that those IRA account holders are not eligible for the QCD until the year in which they reach age 72 — at this early date after the passage of the legislation, the answer is not yet clear.

Also complicating the picture is a new provision that allows a taxpayer to continue to make deposits into their IRA after the age of 70 1/2. Some commentators have indicated that any amount deposited into an IRA after the age of 70 1/2 will reduce the maximum amount available for a QCD.

As the potential recipient of a QCD, a community foundation is not required to enforce the age 72 (or age 70 1/2?) rule – that is the responsibility of the investment manager that holds the assets.  You should, however, review your marketing materials to make sure they reflect the elements of the new legislation. 

The SECURE legislation also brings a significant change to many estate plans. Previously, a non-spouse who inherits an IRA could use a technique known as a “Stretch” IRA, which allowed the IRA recipient to defer taxes over many years. Now (with a few exceptions), an inherited IRA must be fully disbursed within ten years. For some donors, this will make it more attractive to give an IRA to charity, rather than to a non-spouse beneficiary.

Another provision in the new law relates to the repeal of Internal Revenue Code Section 512(a)(7), which taxed certain qualified transportation fringe benefits offered by charities.  This section of the Tax Cuts and Jobs Act of 2017 imposed unrelated business income (UBI) taxes on some nonprofit organizations that provided free parking to their employees. 

The repeal of IRC Section 512(a)(7) is effective December 31, 2017 – which means the tax will be treated as though it was never enacted.  Nonprofit organizations that paid this tax using Form 990-T will be entitled to refunds of taxes paid for 2018 and estimates for 2019.   

Your community foundation – and the charities in your community that you serve – may have paid taxes under this law.  You may wish to communicate to them that a refund of taxes paid may be possible.

 

SECURE Act Could Change Eligibility Date for Qualified Charitable Distributions

Keep your eye over the coming weeks on a piece of legislation in Washington known as the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The Act was approved by the House of Representatives with overwhelming bipartisan support, 417-3, but the measure has been stuck in the Senate.

An important provision of the SECURE Act would increase the age at which a taxpayer must start taking required minimum distributions (RMD) from retirement accounts. The current law sets the age for mandatory RMDs at 70 ½; under the SECURE Act that age would increase to 72.

Many taxpayers who have reached age 70 ½ currently use a charitable gifting tool known as the Qualified Charitable Distribution. A taxpayer who makes a gift using this tool cannot deduct the gift, but also does not need to count the distribution as income. It has become increasingly popular, particularly since so few taxpayers can itemize charitable deductions under recent tax changes.

Congress has now returned from their summer recess, and they have to approve several spending bills by Sept. 30 to avoid a government shutdown. If they can't do that, they can pass a continuing resolution to keep government operating.

Advocates of the SECURE Act have indicated that they will try to include the provisions of the Act into an upcoming spending bill, or the continuing resolution.

Bill and Melinda Gates, Community Foundations and the Challenge of Community Leadership

Community foundations across the country strive to serve as community leaders.  (In fact, according to the national standards, the definition of a community foundation includes the phrase “Serving in leadership roles on important community issues”.)  But tackling important issues can be frustrating.  Critical needs – such as workforce training, educational achievement and dealing with the opioid crisis – can, at times, elude long-term solutions.

If you are feeling exasperated by your community leadership efforts, you’re not alone.  Bill and Melinda Gates, who oversee the Gates Foundation, are also aggravated by their lack of progress in dealing with some of the world’s most intractable problems.  The vent their frustration in their most recent annual letter, which you can read here.

Keep in mind that the Gates Foundation has assets in excess of $50 billion, and last year awarded about $6 billion in grants.  Yet Bill and Melinda are discouraged by some areas where they have had little or no success.  Test scores in education don’t seem to budge. More than 2 billion people around the world lack access to a decent toilet.  And the fight to eliminate polio – a goal that looked within reach a decade ago – seems more elusive than ever.

What’s going on here?  Problems tacked by foundations generally fall into one of three categories.  Some – like creating a new vaccine – required clever analysis by a small group of knowledgeable people.  Other issues, such as providing access to sanitary toilets, are solved by mobilizing a large number of people performing specific tasks.  And a third category would be a combination of both.  Dealing with the opioid crisis, for example, may require both a breakthrough solution and a large team of workers to deliver that treatment.

Sometimes a problem might start out in one direction, then veer down a totally unexpected path.  When the Gates Foundation first began to fight malaria, they thought the answer was a more effective vaccination.  Turns out that wider use of mosquito netting over beds provided much of the solution.

To be sure, your community foundation will want to address matters that arouse a heartfelt desire by local leaders to make their town a better place.  The Gates Foundation reasserts that foundations have their best chance of success if they have “a maniacal focus on drawing in the best talent and measuring results”.

As a leader in your community, you have a birds-eye view of the landscape, and that helps you to understand how you can position your foundation to address compelling community needs.  Whether the issues you address require ingenuity or mobilization, a passion to solve an important problem goes a long way.  “If you want to improve the world,” Bill Gates once wrote, “you need something to be mad about”.

The Biggest Crisis You May Face in 2019? Would you believe, Elasticity?

As part of a community foundation, you will face lots of challenges in 2019.  Investment returns are anemic; asset growth is slowing; and, the field is up against increased competition from commercial donor advised fund providers.  But the next crisis you face may be caused by elasticity.

What?

With the Tax Cuts and Jobs Act of 2017, by some estimates more than 25 million households will no longer be able to deduct charitable contributions when they file their taxes. That’s because the standard deduction has soared to $24,000 for a joint return, and $12,000 for a single return.  If a taxpayer does not have itemized deductions beyond that amount (typically, mortgage interest, charitable contributions and state and local taxes), then they use the standard deduction.

What does this mean for charitable giving?  It means that 25 million households – most of whom have incomes ranging from $100,000 to $500,000 – will no longer be able to deduct charitable gifts when they file their taxes.  In a very real sense, the “cost” of making a charitable gift just went up.  If this leads to a drop in charitable giving, charities could face a significant crisis as donations plunge.

Take the example of a family with total income of $200,000.  Assume they itemize, and they typically make $10,000 in charitable gifts each year.  That $10,000 is an itemized deduction and, with a marginal tax rate of 28%, the net “cost” of those gifts is $7,200 ($10,000, less a $2,800 tax break).

With the new tax law, however, this couple will likely take the standard deduction, and won’t itemize their charitable gifts.  That means there will be no tax cut offset for their $10,000 gift.  In effect, that level of charitable giving costs them 28% more.

This is where the concept of “elasticity” comes in.  Price elasticity of demand is an economic measure of the change in the quantity demanded or purchased of a product in relation to its price change.  If the price elasticity of a product is -0.5, then a 10% increase in the price of a product will lead to a 5% decrease in the amount of the product sold.

Charitable giving is a product, and, with the tax reform act, for 25 million households the price of that charitable giving just went up.  So, how much will charitable giving drop?

That’s hard to say.  Some of the best work in this area is done by professors Jon Bakija of Williams College and Bradley Heim of Indiana University. In a recent paper (see source below), they conclude “peoples’ decisions about how much to donate to charity are influenced significantly by tax incentives”.  While the result depends on factors such as income levels and whether the change is permanent or temporary, the research indicates the price elasticity of demand for charitable giving may be in excess of -1.0 – meaning that a 28% increase in the price of charitable giving could lead to more than a 28% decline in charitable gifts.  Looked at another way, if these estimates are correct, the donors in our example above will decrease their annual charitable giving by at least $2,800.  If millions of households react in this way – well, you can see the crisis this may cause for community foundations, and for the entire charitable sector.

So what does this all mean?  We may not know for a while.  It may be that we need to go through a couple of tax preparation cycles before the reality of the new tax environment is fully understood.  And, economists will tell you that the drop in charitable giving due to the new tax law will be offset – somewhat – by the fact that donors will have more money in their pockets.  (That effect is measured by a different elasticity – the income elasticity of demand, which should cause charitable giving to go up as people feel wealthier).

It might be too soon to determine if the new tax laws will cause a crisis for charitable giving.  Donors may be deeply committed to the charities they support, and they may continue their giving despite the new laws.  It’s probably fair to say that those charities that have done the best job of building a strong relationship with their donors will suffer the least. 

As John Kennedy said nearly 60 years ago, there’s two ways to look at a crisis.  When written in Chinese, the word “crisis” is composed of two characters.  One represents danger.  The other represents opportunity.

 

Source: How Does Charitable Giving Respond to Incentives and Income? New Estimates from Panel Data; Jon Bakija and Bradley Heim; National Tax Journal, June 201

Your Best Employee May Be The One Who Tells You When You Are Wrong

It is March 27, 1977, and two 747 jets prepare to take off at the airport on the island of Tenerife. The captain of one of the planes, Jacob Van Zanten, has nearly rock-star celebrity status among airline pilots. He is a leader in his profession, and his face is used in advertisements for KLM, the company he flies for.

Van Zanten awaits instructions at the end of the runway. “Okay”, says the tower controller, “Stand by for takeoff”. Van Zanten hears the word “Okay”, and begins to rev the engines and proceed down the runway. He does not hear “Standby for takeoff”, because he is distracted. Because of heavy fog, Van Zanten doesn’t know that another 747 is already on the runway. . “Let’s go”, Van Zanten says.

Behind Van Zanten, in the navigator’s chair, the second officer has realized that Van Zanten is mistaken. He has time to correct the error, but he does not. A subsequent investigation concludes that the second officer felt too junior to the highly-esteemed Van Zanten, so he stays quiet. Van Zanten’s plane collides with another 747 on the runway, and 583 people died.

As a leader of the community foundation, you are not making decisions that are a matter of life or death. But you make decisions every day, and not all of your decisions will be the right ones. If you have a well-functioning team, you might have one or more staff members who are willing to challenge you, to tell you when you might have made a mistake.

The value of just such a staff member is examined in a new book, The Fearless Organization, by Amy Edmondson, a professor at Harvard Business School. Professor Edmondson says that organizational leaders need to make sure that their staff operates in an environment of “psychological safety”.

Psychological safety is broadly defined as a climate in which people are comfortable expressing and being themselves. In a psychologically safe workplace, people are not hindered by “interpersonal fear”; they feel willing and able to take the inherent personal risk of candor.

In the community foundation field, this attribute can be particularly useful. You are perceived as controlling a large amount of grant funding each year (though, in fact, you don’t – your grant review committee or board handles that). Yet very few people are willing to challenge you, to let you know you are wrong, to tell you that you have made a mistake. This makes a staff member who is willing to be candid with you all the more valuable.

Over my 22 years as a community foundation executive director, heaven knows I made my share of mistakes. The best outcome, however, came when a staff member was willing to challenge me, to second-guess me, to get me to understand that I had been wrong. I grew as a leader, and our foundation was better off because I was able to see my error, and correct it.

So the next time a staff member challenges a decision you have made, listen carefully. Their willingness to speak up can be a learning opportunity for you, and can help you towards your goal of creating a great community foundation.

Free Parking for Employees? You May Owe UBIT Taxes

A little-noticed provision in the Tax Cuts and Jobs Act of 2017 could force community foundations – and the nonprofits that you support – to file Form 990-T, the tax return used to report unrelated business taxable income (UBTI).  But the law is frustratingly vague.  So, add this problem to the list of insomnia-producing worries to keep you awake at night.

The TCJA created a new section 512(a)(7) which specifically targets transportation fringe benefits provided by tax-exempt organizations to their employees.  The law prevents a for-profit organization from deducting qualified transportation fringe benefit (QTFB) when computing taxable income; the mirror image law for nonprofits forces a charity to pay taxes on the value of QTFB provided by employees.  Charities must include in UBTI the value of QTFB that would be disallowed as deductions to a taxable entity.

Qualified parking is considered a QTFB.  Qualified parking is defined as “parking provided to an employee by an employer … on or near the employer’s business premises.”  If you have a parking lot close to your offices, and your staff is allowed to park there for free, you might have to file a Form 990-T and report the value of that fringe benefit as taxable income.

Sound like a mess?  Yes, it is.  And from what I read the new law is very unclear.  Groups ranging from the National Council on Nonprofits to the American Institute of Certified Public Accountants have asked the IRS for clarification.  Does the IRS really want millions of nonprofit organizations to incur the time and expense required to file a Form 990-T, when they might otherwise not have to do so?

I’m going out on a limb here, but I’m going to predict that the Feds will come to their senses and issue guidelines that will relieve charities from the burden of filing a 990-T just to report free parking.  But, as with any tax matter, you should have a conversation with our tax preparation firm to determine what you should do for 2018.  In the meantime, go ahead and count sheep instead of parking spaces --- and enjoy a good night’s sleep.

Want To Boost Your Estate Planning Gifts? Wording is Important!

Professor Russell James from Texas Tech (a great resource for planned giving information) cites a study that was done regarding requests for charitable gifts in estate plans.

Professor James refers to a study in which professional advisors asked their clients if they would like to include a charitable bequest in their estate plans. As it turns out, the wording of the request resulted in a significantly different response rate.

When a professional advisor did not ask their client about making a charitable gift, around 5.0% of clients included a charitable bequest in their planning.

By being more intentional — by asking “Would you like to leave a charitable gift?” — the response rate more than doubled, to 10.4%

More creative wording led to an even higher response rate. When the professional advisor said, “Many of our clients like to leave money to charity in their will. Are there any causes that you are passionate about?”, the response rate jumped to 15.4% — more than three times the response rate when no question was asked.

Note that the wording makes two connections. First, it indicates that “many clients” do the same thing. Second, it puts the focus on “causes that you are passionate about”. Planting those two seeds tripled the response rate.

The lesson here? Thoughtful wording when asking for a charitable bequest can increase the number of estate gifts that you will receive in the future.

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Donor Advised Funds - Big Changes Coming?

There’s been a lot of chatter lately on the potential of new regulations on donor advised funds. Nonprofit Quarterly has run a series of excellent articles advocating reforms by Dean Zerbe, Ray Madoff, and Ruth McCambridge.

The defense of a “hands-off” approach was put forth by five of the leaders of our field: Douglas Kridler, Alicia Philipp, Lorie Slutsky, Steve Seleznow and Max Williams — all of them leaders of large community foundations. They argue against additional regulations on donor advised funds, stating “our real, and hopefully shared, concern is to avoid government overreach, excessive regulation, and bureaucratic waste that could result from such rules”. You can read their article here.

The issues are masterfully summarized by Alan Cantor (who also cites other articles critical of donor advised funds). Cantor makes some excellent recommendations to the field. He also suggests a powerful strategy: “[I]f Congress doesn’t undertake reform of donor-advised funds? Community foundations should take it upon themselves … thereby establishing themselves as institutions that focus on improving the lives and futures of those around them.”

In the research we just posted, we take a different approach. We ask the question, “How can a community foundation more closely align grants from donor advised funds with the critical community needs identified in their unrestricted grantmaking process?” You can read the strategies we uncovered for strengthening this philanthropic partnership here.

A Wild Weekend Ten Years Ago, and Lessons for Today

Thinking back to the start of the financial crisis ten years ago is a good reminder that, like many things, stock prices do not rise in a straight line forever.  It’s been a good run for the last ten years, but how much longer can the good times last?  A decline is inevitable; here are some thoughts on how you can prepare your community foundation.

The morning of Monday, September 15, 2008 was quite extraordinary.  Those who watched global financial markets the previous week knew that we were in for a rocky patch.  The federal government had bailed out Bear Stearns in March and the Treasury had taken over Fannie Mae and Freddie Mac the weekend before.  Something big was coming.  We just didn’t know the extent of the damage.

Two blockbuster headlines greeted us that morning.  First, BankAmerica was buying Merrill Lynch – perhaps the stodgiest of the stodgy brokerage firms, which was created the same year the first community foundation was launched in Cleveland in 1914.  But more ominously, Lehman Brothers, a fixture on Wall Street for more than 150 years, filed for bankruptcy.

Stock prices swooned.  The S&P 500 index was already down 22% from it’s high the previous year.  In the next six months it would plunge another 47%.

Both Merrill and Lehman had been brought down by “toxic debt” – securities that many thought were safe but which were, in fact, close to worthless.  These securities – various forms of bonds made up of home mortgages – were widely held in the financial field – including by community foundations.

The collapse of Lehman is now parodied in popular culture.  In the movie Despicable Me, the main character Gru travels to the Bank of Evil, the bank that funds all evil plots for villains around the world, to try to take out a loan. As he passes under the banner with the bank's name, under "Bank of Evil", in small letters, it reads, "Formerly Lehman Brothers".  Even Disney has gotten into the act.  The animated film Zootopia depicts a financial firm called "Lemming Brothers", staffed by lemmings.  The double meaning is obvious.

The effects of the market decline on our community foundation were profound.  Our grantmaking slumped as we applied a payout ratio to a much smaller investment portfolio.  And our operating budget, built on quarterly fees, generated revenue 30% below what we had projected.

What can you do to get ready for the next market decline?  There’s at least three things to consider. 

First, have an intentional discussion with your investment committee, and your investment managers, regarding the impact of a stock market decline on your portfolio.  Do you have a sensible asset mix?  Are you overly exposed to risky stocks?  Put the question on the table, and get some answers. 

Second, brace your operating budget for a market decline.  Do you have a cash balance sufficient to weather an extended period of lower stock prices?  Are there elements of your operating budget that can be deferred, if necessary? 

Finally, educate your board, your donors and the nonprofit organizations you support.  Community foundations last forever, which means they can and will be exposed to the ups and downs of financial cycles.  A drop in the stock market will mean a cutback in your grantmaking, but tough times don’t last forever.  You will ride out the storm, and come back even stronger. 

I’m not predicting a financial crisis, and I have no idea how serious or prolonged the next financial slump will be.  But financial cycles are inevitable, and community foundations should be prepared.  “History does not repeat itself,” Mark Twain has written, “But it often rhymes”.

Charitable Deduction Income Limits and The Standard Deduction - A Note of Caution

There’s lots of changes in the new tax law (Tax Cut and Jobs Act of 2017 or TCJA) that will reduce the incentives for charitable giving (such as raising the standard deduction, meaning that fewer taxpayers will itemize).  One break which will help donors, however, is an increase in the charitable deduction income limitation.

The deduction for charitable giving is limited to a certain percentage of income, based on the nature of the gift made and the type of organization receiving the gift.  The new TCJA law raises the income limitation for cash gifts from 50% of adjusted gross income to 60%.   The new 60% charitable deduction limit applies only to cash gifts — not real property, not appreciated assets, just cash. (The deduction limits remain the same for gifting other assets, such as stock, real estate, and tangible goods.)   Any gifts above the income limitation can be carried over for five years. 

The increased standard deduction in TCJA means far fewer donor will itemized their charitble deductions.  Some have advocated “bunching” charitable contributions in a single year (by, say, a donation to a donor advised fund).  This would allow the donor to itemized deductions in the year of the “bunching”, and then using the standard deduction in subsequent years.

But in some circumstances this strategy may not be effective – and the problem can be illustrated with an example.  Suppose Bill and Melinda Getz are both 70-year-old retirees.  In 2017 they deposited $50,000 into their donor advised fund but, due to 2017 income limitations, they could only recognize $35,000 of that gift for their 2017 taxes.  They carried forward $15,000 to be used in 2018.

Bill and Melinda have $8,000 in itemized deductions for 2018.  Taking into account the $15,000 in charitable contributions carried forward from 2017, they would have $23,000 in itemized deductions.  They choose instead to use the standard deduction for a married couple for 2018, which is $24,000.  Since they have not used their charitable deduction carry-forward from 2017 to 2018 it carries forward another year to 2019, right?  WRONG!

Under current IRS regulations, the $15,000 carryover is treated as if it were claimed, even though Bill and Melinda choose the standard deduction. IRS rules say that when a taxpayer uses the standard deduction, any charitable deduction carry-forward is reduced as if you took the maximum possible charitable deduction.  Despite the fact that they did not itemize, the $15,000 of the carryover is treated as if it were reported and deducted. Bill and Melinda essentially forfeit their $15,000 charitable contribution deduction carry-forward.

For taxpayers who can “bunch” their charitable contributions without carrying a deduction forward due to the income limitation, this rule does not apply and accumulating charitable gifts in a single year can still be a good strategy.  But if “bunching” results in a charitable deduction carry-forward, the effectiveness of this strategy will be severely limited.

"An Agile Servant", Revisited

Next year will mark the 30th anniversary of one of the seminal works in research on the community foundation field.  An Agile Servant (The Foundation Center, edited by Richard Magat, 1989) was published to celebrate the seventy-fifth anniversary of the community foundation field.  It was one of the major products of the National Agenda for Community Foundations, a three-year project overseen by the Council on Foundations.

The book itself fits into two distinct parts.  Part I is a series of ten essays on everything from asset growth to leadership to collaboration.  In Part II, the reader can dig deeper into stories from sixteen community foundations across the country.  These stories talk of what works – and what doesn’t – in strategic directions relating to grantmaking, asset development, and community leadership.

Growth of community foundations was strong in the 1980’s, yet pale in comparison to today’s field.  The book noted 259 community foundations with total assets of $4.7 billion.  Today, over 850 community foundations boast collective assets in excess of $90 billion.

Even from a distance of nearly thirty years, many of the topics of the book still ring true.  James Joseph called on community foundations to step up their roles as community leaders.  Paul Ylvisaker cautioned that as the field grew we would become “inviting targets for public attention and increased regulation”.  Jennifer Leonard (now President & CEO of the Rochester Area Community Foundation) reviewed the different stages of community foundation growth and how those stages influence asset development priorities.

Steve Minter, who served as president and executive director of the Cleveland Foundation from 1984 until 2003, called for the creation of national standards for community foundations.  Eventually in 2000 the field approved those operating standards, and since that time they have been widely accepted by the entire field.

So if you have time yet this summer, dust off our copy of this book, or find it in your local library.  The title itself is a reminder to all of us that we need to be agile in what we strive for, while remaining a servant to our community.