With each new administration, there is the potential for tax law changes. For individuals, estate planning exemptions could decrease, and income tax rates could increase. There could be limits on itemized deductions – including the charitable contribution deduction – which would make these contributions less valuable. Some fear changes in the tax law could decrease the incentive for people to give to charity.
In 2021, gifts to charity totaled almost $485 billion. These gifts were used to fund education, human services, and health programs, among others. It is difficult to imagine decreased funding to such programs during an ongoing global pandemic, when there is an increase in the need for services as a result of employment loss and healthcare needs, and when children continue to experience disruption in their schooling.
The likelihood of significant tax reform in the short term may be minimal. That may be a good thing for charities. But how much would it matter? Are tax incentives the primary driver of charitable giving? Generally, no. While philanthropically minded clients should work with their Brown Brothers Harriman (BBH) wealth planner and tax advisors to ensure charitable gifts are structured efficiently, tax incentives should never be the sole driver of charitable giving. So, why do people give to charity? Here are four reasons.
Four Reasons People Give to Charity (Other than Tax Benefits)
- Happiness. People who give to charity are happier. While there is a chicken-and-egg conundrum here – does giving make people happy, or do happy people give? – the fact remains that giving to charity is positively correlated with happiness. This is true across genders, marital status, and income brackets. And the more people give, as a percentage of income, the happier they are.1
- Confidence. People give when they have confidence the charity can accomplish goals that align with their values. To feel confidence, first a donor must evaluate her values and consider whether the charity’s mission is aligned. If there is alignment, a donor must trust that the charity will use her money wisely toward accomplishing its vision. In terms of using money wisely, for many years, donors focused on the concept of overhead, suggesting that charities should be efficient and keep overhead and operations costs low. More recently, there has been a shift away from this view as donors have recognized that investments in staff and infrastructure are essential to the growth and success of every charity, or any enterprise for that matter. For example, in 2019, several large foundations announced plans to help more charities pay for overhead expenses, such as wages, rent, and technology.2 Whether money is used for overhead expenses, programming, or capital expansion, confident donors believe that their contribution will further the charity’s mission.
- Empathy. Many people give to charity because they have compassion for those who are less fortunate. Compassion may be more heightened in a time of crisis, as we are inundated with information about the needs of others. Giving out of empathy may be steeped in altruism, but donors who give for this reason may receive certain benefits as well, including social connection.
- Social Connection. People give because they enjoy the social connections they make through philanthropy. This may be particularly important to women, if their involvement levels with giving circles and social network philanthropy are an indication. In a giving circle, individual donors contribute funds, often of a modest amount, to a pooled fund, then collectively agree on charities to receive the funds. In these circles, like-minded donors can make a big impact through their collective giving. Giving circles have been around for decades but have grown dramatically in recent years. There are more than 1,600 active giving circles working in all 50 states, and 70% of their members are women.3 In terms of giving through social networks, women use technology platforms more than men and give more money online than men. Recent research shows that women are interested in philanthropy that fosters social connectivity.4
These are four common reasons people give to charity. Individual donors may be motivated by other reasons as well. In terms of taxes, philanthropic giving should be structured to ensure it is efficient, but tax incentives should never be the sole driver of charitable giving. In fact, a person making a charitable gift may end up paying less tax, but that person will never end up with a net increase in the wealth retained. Making a gift to charity only makes sense for someone who is philanthropically minded.
Through our Philanthropic Advisory practice, we help clients identify their values and align their values with their philanthropy. We also help clients structure their philanthropy in a tax-efficient manner. Please reach out to your BBH wealth planner or a member of our Philanthropic Advisory team if you are interested in discussing these topics further.