Impact of Proposed Tax Changes on Charitable Deductions

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I’d heard a little about this back pre-Super Committee when Obama was offering the “Grand Bargain,” but hadn’t tracked it very closely, and assumed that it was a massive change (doing away with the deductability of charitable contributions) which probably wouldn’t happen.

Today, I ran across The Center on Philanthropy at Indiana University’s analysis from October, and it appears that it’s a more targeted reduction (and not particular to charitable contributions).  As I was reading the first couple of pages I thought, “Wow, this is an interesting analysis, but it really needs an executive summary.”  And then I kept going and discovered that *was* the executive summary.

So here’s my attempt at summarizing:

Proposed Tax Changes

  • Top marginal rate to be restored from current 35% to previous 39.6%.
  • Deductions (of all types, not just charitable contributions) for high income households ($200K+ AGI individual, $250K+ married) to be capped at 28% vs. today’s 35%.

Hypothesis

Rich people will give less, because (1) They’re paying more in taxes, so have less to give; and (2) The tax benefit they get from donations decreases.

Findings

Yes.  Charitable giving is expected to go down, something like $800M in the first year, and $2.4B in the second year.  This is off an expected baseline giving of $197B in the first year and $185B in the second year, so amounts to about 1.3%.  The amount of additional tax revenue expected by these changes is 2013 is $138B, at a time when the annual deficit is projected to be $691B.

See the report for more details about the model, the history, the impact if only one or the other of the proposed changes goes through, and lots more prose apparently written by accountants.

Personal Thoughts

Sure, it’s hard for non-profits to take an added hit when they are already struggling, and the demand for services is going up.  But if we’re talking about $138B in deficit reduction for a $2.4B loss in giving, I think it’s a worthwhile trade.  Note also that projected giving between the two years is projected to drop from $197B to $185B, and only $2.4B of that is due to the tax changes.  The other $9.6B (exactly 4x as much) is due, if I understand the model correctly, to the downward momentum of the economy.  So, working to improve the economy, say, by reducing the deficit, would actually be addressing the bigger issue.

Based on this report, I will be unpersuaded by non-profits that argue that these tax changes will be life-threatening to them.

 

Kids and Money, Part 1, “Giving”

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Yesterday, I participated in a workshop for families organized by financial planner Cheryl Young and the Silicon Valley Community Foundation.  This was a new project for them, and for the first time being offered, I thought they struck a good balance between content for the kids with activities to keep them engaged, and content for the parents.

The two-hour program featured:

  •  A brief introduction
  • A testimonial from one of the parents, talking about the types of volunteer experiences she and her kids had engaged in, along with some cues about what activities might be “too early” for some of the younger ones
  • Michelle Berg, community relations and events coordinator from the Second Harvest Food Bank, spoke about her own experience as a client of the food pantry growing up, and the alarming level of need (nearly 10% of the people in these counties, nominally one of the richest parts of the world, used the services). SHFB is able to leverage donations of imperfect/hard-to-sell fruits and vegetables, plus relationships with major grocery chains to really stretch their resources, providing lots of meals (100,000/day (!), 45 million pounds/year(!!!)) at just 50 cents per meal.
    After the talk and a very short video about an elementary school student  who organized a food drive  (1:50 YouTube video), we did a short food-sorting project, helping to pack healthy snack bags.  Our group of about 30 people (more kids than adults) made short work of the packing project, and had a snack break of our own.
  • Jennifer Yeagley, the Executive Director from My New Red Shoes, described the importance of letting poor and homeless children start school with the sense of pride and belonging that comes from a new outfit and school supplies.  Recipients get a pair of new sneakers, a $50 Old Navy gift card, school supplies appropriate to their age, and a card from a volunteer who helped make and pack the gift bag.  The kids split off to decorate cards for the bags (which ended up being a favorite activity of the day for most of them).
  • Meanwhile, the adults learned a bit more about Silicon Valley Community Foundation and the 5 major initiatives for our community.  Gina Dalma, the Program Officer for SVCF’s education initiative spoke about the inequality in the schools in our counties, as well as the hope for advancing the laggard schools with appropriate leadership and teacher training.  She answered questions from the very education-focused parents.
  • I got a chance to describe my book project, and appreciated the friendly reception for what was essentially the first public presentation of the work in progress.
  • Cheryl Young finished off with a plea to the kids to engage their parents in conversation about what they could do.  I was impressed that even as a financial planner, Cheryl felt it was more important to have “Give” come before “Save” in the workshop series.  I think her comments and mine struck a very similar tone, even without any advance planning.
  • Marie Young, Director of Donor Learning and Engagement of SVCF, prepared packets for the adults, with a bibliography of family-friendly books on giving, some tips for starting conversations, and a reprint from a Scholastic Family article, as well as a bunch of SVCF background information.  The kids’ goody bags were more fun:  a t-shirt and stuffed animal from Cheryl, and a pen that looked like a fork from Second Harvest Food Bank.
Overall, it was a nice event, engaging both kids in the 6-12 year old range, plus their parents, to learn more about the needs of the local community, and the organizations that are helping to fulfill those needs, and what they can do to contribute.

Three Questions to Uncover your Passions

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What inspires you to give back?

Most giving back results from a personal connection to a cause or group.  If you haven’t yet found the cause that drives you to learn more, do more, and tell more people about it, try asking yourself the following Three Questions:

  1. What organizations do you give credit for the person you have become?
  2. What activities bring you JOY that you want to make sure people in the future can do?
  3. When you travel (in your own neighborhood or around the world) what groups do you see that are treated unfairly or need extra help?

Yes, OK, I’ll share my answers to these questions:

  1. What organizations do you give credit for the person you have become?
    (Chronologically…) My church (the United Church of Christ), Boy Scouts, Harvard College, Stanford University, improv, and the Reuters Digital Vision Program.
  2. What activities bring you JOY that you want to make sure people in the future can do?
    Listening to jazz, watching live theater, walking in nature, snorkeling.
  3. When you travel (in your own neighborhood or around the world) what groups do you see that are treated unfairly or need extra help?
    Those suffering from poverty, homelessness, and disasters. Women and girls, especially in the developing world, but in America, too. Cancer patients and their families. Torture victims.

These answers are a pretty good reflection of how I focus my giving back.

Volunteering:

  • I volunteer quite a bit with my church, especially around Peace and Justice issues and our connection to Stanford University.

  • I spent a year in the Reuters Digital Vision Program volunteering with the Grameen Foundation on a project to improve access to microcredit (small loans to women entrepreneurs in the developing world) through software.
  • I view my performances with an improv troupe as giving back (we aren’t paid, and all of the ticket proceeds go to scholarships).

Donating:

  • I make financial gifts to support my church, poverty alleviation and disaster relief efforts, Harvard, the environment, medical research and jazz (in roughly that order).

  • Being an active audience member, seeking out rising jazz talent (attending and tipping!) helps preserve that community.
  • I’ve set up a living trust that will, upon my death, distribute the bulk of my estate to some of the organizations and causes listed here. (Watch for a future blog post on this important topic….)

The Three Questions were the seed that germinated into the book Giving Back. I started trying them out on people in December 2010, and here are some answers that were shared back then.
I invite you to consider your answers, and would love to hear about them, in the comments if you feel like sharing globally, or in email or conversation if that’s more comfortable.

What organizations do you give credit for the person you have become?  What activities bring you JOY that you want to be sure people in the future can do?  When you travel (in your own neighborhood or around the world) what groups do you see that are treated unfairly or need extra help?

The Three Questions as posed to Lisa Chu's Essential Self Extravaganza (Dec 2010)

 

Donor Advised Funds

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Bottom line:  If you are paying capital gains tax and donating cash to charities in the same year, you’re wasting money.  Giving appreciated securities can be a hassle, but a Donor Advised Fund makes it (more) convenient and simplifies other record keeping.  Schwab, Fidelity, and Vanguard offer “free” accounts.  Get one.


Donor Advised Funds (DAFs) have been gaining popularity recently, but they still don’t occupy their rightful place as the default choice for mid-level givers (those who give in the $5,000+ range across all their donations in a year).

A DAF is sort of like having your own foundation, but the money is pooled with other people’s, and bookkeeping records track who contributed what (and therefore, how much you can subsequently pay out to charitable causes).  You make contributions (typically of appreciated securities) to the DAF on an as-needed basis, and then draw down the funds as you recommend grants to non-profits.

Why should you care about a DAF?

  1. It simplifies things for you.  All your records are in one place, and you can get year-end or longer summaries of your giving.  The deduction comes when you donate to the DAF (not when you recommend a grant to a non-profit), so you typically only have to track a smaller number of donations, rather than every $50 gift that you make over the course of a year.  (Though the DAF keeps track of those for you, too…)
  2. It simplifies things for the agency you’re giving to.  It’s a hassle for most small non-profits to get appreciated securities.  But in order to avoid capital gains tax, you should be giving appreciated securities.  Give them to your DAF, and let them deal with it.  Your local non-profit gets a check, not shares of stock it then needs to sell.
  3. It allows you to be anonymous if you choose (and still get the deduction.)
  4. You can control the timing of the deduction separately from the timing of the gift.  Donate to the DAF now, get your deduction now, and then recommend a grant from the DAF to your alumni association in 2 years for your 35th reunion year.
  5. Gifts cards (offered by Fidelity Charitable Gift Fund  ) let you give someone else (a child or any other gift recipient) the ability to choose a non-profit where the donation goes.  This can be a good way to introduce kids to the practice of charitable giving.

What does it cost?

Not much.  Typically 6/10 of 1% of the assets of the fund are charged on an annual basis.  The trick is, you don’t really need to keep assets in the account.  You can, but mostly, you can fund the account just before you make a round of grant recommendations to your chosen charities, so the DAF itself has only a nominal balance.  In this case, the $100/year minimum fee kicks in (drawn from the DAF itself, so it reduces the amount you can give, but not an expense to you).  Money that you do have in the account istypically invested in some fund or mix (in a similar fashion to the investment options of your 401K, probably), and you pay the management fees on those funds in the same way that you do for a 401K (subtracted from the share price, again reducing the amount available for gifting, but not a direct expense to you.)

Where can you get one?

The major brokerages offer them as a service to their clients.  Here are 3 popular sources.

Provider / URL

Minimum Initial Contribution

Minimum Follow-on Contribution

Minimum Grant to Charity

Offers “Gift Cards”?

Base Fee

Fidelity Investments
www.charitablegift.org

$5,000

-

$50

Yes

0.6%

Schwab
www.schwabcharitable.org

$5,000

$500

$100

No

0.6%

Vanguard
www.vanguardcharitable.org

-

-

$500

No

0.6%

What are other requirements, drawbacks or hassles?

  • As the chart above shows, you do need to have a fairly substantial amount ($5,000) to set up the accounts.  If you give away at least that much in a year, and you have a brokerage account at one of these providers, then I’d say it definitely makes sense to set up a DAF.  If you typically give  $2,500 – $5,000 in a year, but want the convenience of a DAF, you might be able to “double up” and fund the DAF in December 2011 with the money that you would usually donate in 2011 and 2012.  You can then make the grants to your chosen organizations over the course of the two years, so there’s no perceived difference to them.  As the chart shows, once the account is established the minimums for adding to it are much lower ($500 or no limit).
  • The processing done by the DAF provider will also typically take a few days to authorize a gift, so it’s not the best for truly time-sensitive things.

Giving to Somalia, on behalf of 11-year-old Melissa

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Bottom Line:  The dire famine situation in Africa, especially Somalia, has been pushed from the headlines it deserves by the Debt Ceiling Debate and financial situation in both US and Europe.  Melissa, an 11 year old, is still paying attention, and wanted help putting her $10 gift into action. Her generosity inspired me to research the options and donate the money to Concern Worldwide US. While I was there, I made a gift of my own. Thanks, Melissa. Your example is inspiring.

Today, one of my church friends told me a heart-warming story.  Her granddaughter Melissa was reading about the famine in Somalia.  When she finished reading the entire article, she ran to her bedroom, opened up her piggy bank, and came back with $10, which she handed to her grandmother and said “Nana, I know you’ll be able to do something to help them with this.”  I admired the young girl’s generosity, as this was a large gift from someone of her age, and her grandmother and I talked about the best way to put it to use.

One option was to use our church giving (United Church of Christ’s One Great Hour of Sharing) as an intermediary for this gift.  Normally, I’d consider that a very good option.  For special appeals, 100% of the donations go straight to the cause, plus through the network of local churches and partnerships on the ground, they often have the relationships with disaster relief organizations already established, so money can be put to work very quickly.  In this case, however, the urgency is high, and since our local church hasn’t made this a special appeal, a gift in the offering plate would likely sit for weeks or months before it made it to its destination.

Instead, I thought an online donation would result in the money getting there more quickly.  I offered to research organizations and make the gift on Melissa’s behalf.

I started at CharityNavigator, which evaluates different non-profits to determine how efficient they are.  They review the IRS 990 forms that non-profits submit, and determine how much of the money goes to fund raising and administrative costs, and how much goes to “program” (the work directly supporting the cause).   They have other metrics for the growth and capacity of each organization, and boil it all down to a four-star scale.  I was surprised that some of the organizations that I respect had earned only 3 stars (Oxfam America, 14% fund raising expenses pulled it down…; World Food Program USA 8% fund-raising, and a negative overall asset level, their site also mentioned that they used a UK clearing bank, which might take an additional cut from your gift) or even 2 stars (Church World Services 11% fund raising, but apparently hurt more due to their anemic growth over the past years).

So, instead of assuming that I knew a good place to go, I searched for charities that matched the keywords “Africa famine”.  Twenty search results came back.  I compared several (a nice feature of Charity Navigator, worth doing the free registration) and then visited the websites of a few of the results that had a 4-star rating.  Confident that Charity Navigator had screened out the organizations that weren’t good stewards of the money, I focused on assessing whether I thought these were effective in delivering the program and communicating their results.  Given that the situation in Somalia is dire, I expected that an organization that was serious about helping would have special web pages and resources linked from their main page about it.  (UCC’s OGHS appeal page was a bit harder to find)  Recent, frequent updates helped build credibility, as well as evidence that they had been working in the region and were well informed and well-staffed, and presented that information to donor prospects.

Ultimately, I selected Concern Worldwide US.  Its 4-star rating included a less than 3% fund-raising expense, modest administrative expenses (3.4%), a strong assessment of their capacity, and a salary for their executive director that was under $100K.  Their website also impressed me with the direct link to a nice summary of the situation and their expertise for handling it.  I donated directly to them via Kintera, and inspired by Melissa’s generosity, multiplied her gift by 10.

The runner up organization I considered was Mercy Corps.  They’re a much larger organization (annual budget $245M vs. Concern Worldwide US $21M), and also got a 4-star rating, but their administrative expenses were a bit higher than Concern Worldwide US’s.  If you wanted to support a larger organization that might have greater scale to make a larger difference, Mercy Corps would be a good choice.

Thank you, Melissa!

Submit your Stories

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Now that much of the main content for Giving Back is written, I’m looking to balance the “how-to” framework and resources with more stories from real people.  If you have a good story about how volunteering or donating changed your life, I’d love to hear it, and potentially include it either in the book or as a blog post.

Stories should be short (less than 300 words, about three times as long as this blog entry…)  and first-hand (no anecdotes from around the web, please.) You can submit them at this web form.  If I use your story in the book, I’ll send you a free copy.  Thanks!

Welcome!

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Come in, come in!

If you’re looking for information about giving back–both volunteering time and donating money–you’ve come to the right place.

It’s a topic that fascinates me, to the point of writing  a book about it.

Giving Back:  Discovering your Values and Putting them in Action   is not available yet, but the ideas are formed, and rather than wait until there’s an honest-to-goodness book with pages (or even an eBook with virtual pages), I’ll use this site as a way to share some of those ideas.

In addition to content from the book, I’ll also write some stand-alone blog posts:

  • Shorter, “half-baked” pieces
  • Book reviews or pointers to other resources
  • Notes from meetings and talks on the topic
  • Responses to questions or reactions to comments
I look forward to the journey, and will close with a quick acknowledgment to Eugene Eric Kim, who told me the right way to write a book is to start a blog.  Hey, it only took me 8 months to agree!
-SPK

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