The Trump tax plan was expected to enable the well-to-do to keep more of what they had worked hard for. But it turns out the administration may have miscalculated the psychology behind some wealthy clients’ charitable giving.
In 2018, for the first time in 50 years—or since charitable donations have been tracked—giving by individuals fell below 70% of total gifts of $427.71 billion, according to an annual study by the Giving Institute, an organ of Indiana University’s Lilly Family School of Philanthropy, the only organization in the country that tracks such data.
James Maher, the CEO of St. Louis-based Archford Capital Partners, said one reason that number is shrinking is because the new tax law made it more difficult for individuals to get favorable tax treatment from the largesse.
Maher, whose niche is philanthropic strategies, pointed to the fact that the new tax plan caps state and local tax deductions, at $10,000 for married couples 70.5 years old and older, and raised the standard deduction from $12,600 to $27,000.
The disconnect, says Maher, is that the government “thought fundamentally that people were just gifting, and they weren’t also gifting because there was some benefit to them.” Maher, whose registered investment advisor oversees more than $500 million in assets under management, much of that from high-net-worth clients, says that “if you take back the incentive to give, they will back off.”
An elderly couple who was accustomed to giving $10,000 to their local church—religion leads the list of most popular destinations for philanthropic giving, followed by education, human services, foundations and health—would have to give at least $27,000 in order to get any tax benefit. Those 75 and over give an average of 8.8% of their income to charity, more than younger generations, so as gifting gets more expensive, the more generous givers are likely to give less.
Maher is a longtime devotee of philanthropy. Fresh out of college and law school at the University of Missouri, he turned to nonprofit organizations as a means of making friends and business associates; those relationships were helpful as he transitioned from law to financial advice.
“When I moved to the St. Louis area, I got to know people in the community through nonprofit organizations that I volunteered with. My book of business was built out that way; it was a way for me to be active in the community.”
In college he volunteered for the United Way. After graduating, he was president of the Mizzou Alumni Association, St. Louis chapter. Family medical situations prompted him to get more involved with the American Red Cross and St. Louis Children's Hospital.
“I’ve been involved in philanthropy over 30 years and have set up more donor advised funds than any advisor in the area,” Maher said, “but immediately when that tax law passed I realized this is not going to be a good outcome.”
However, Maher says, not all is lost, because the government left in a loophole in the form of giving through an IRA. The same $10,000 that would be taxed if given directly, Maher says, can be given through an IRA with no taxes taken out at all. This also helps with Medicare and Medicare supplements—if a couple can keep that $10,000 out of their income, their Medicare costs will be lower.
“The industry is always talking about the best interest of the client,” he claims, but “what about best interest giving?” The charity, he said, gets the $10,000 whether or not the individual giver gets taxed, and so have not had much influence on the impact of giving to the donor.
Maher thinks that “we really need to start from a public education standpoint in that people need to be aware that there is a way they can still support organizations that they want to support and that there is a subsidy for them if they do it correctly.”
Imagine, Maher says, if nonprofits lost 10% of what they annually get over the next 10 years. The result would be cataclysmic. In addition, he said, the population over 70.5 now numbers only about 31 million but by 2035 is estimated to number about 60 million. “If we take back this incentive to give, some people will back off,” making the IRA an important tool to keep nonprofits afloat.
James F. Baka, president of Chicago-based RIA Calamos Wealth Management, noted also the growth in popularity in recent years of donor-advised funds, investment vehicles that can operate like a 401k, which, due to increased offerings from custodians like Fidelity or Vanguard and the strength of the equity markets, have grown in popularity among the affluent for giving funds to charities.
“The government has still left some ways to incent people to give to nonprofits,” says Maher, “and if you haven’t done it that way, I feel like you’re pumping on that old cistern well trying to make it flow. Once people realize that this works, it will be an important stream of income to that nonprofit sector.”