By Michael Cecere, CPA, MST & Julianne Schwallie, CPA, MBA
Gray, Gray & Gray, LLP
The landscape of charitable giving has evolved through various tax policy changes over the years. The current proposal by Massachusetts Governor Maura Healey to cap charitable deductions represents one of the most significant shifts we’ve seen in decades. If implemented, this change would limit state tax deductions for charitable donations to $5,000 for individuals and $10,000 for married couples filing jointly. This has the potential to reshape how donors approach their giving strategies and how nonprofits plan their fundraising efforts.
Understanding the Current Landscape
Before we examine the potential impact of this cap, it’s important to understand the context. The Massachusetts charitable deduction has had a complex history since it was approved by 72% of voters in 2000. Despite this overwhelming support, the deduction has only been in effect for three years: 2001, 2023 and 2024. The Legislature suspended it in 2002 and again in 2021, both times overriding a veto by former Governor Charlie Baker.
This inconsistent implementation has already created planning challenges for nonprofits. Now, with Governor Healey’s proposed cap, organizations face a new set of considerations as they look toward the future of their funding models.
The Financial Mathematics of the Cap
The proposed deduction cap would primarily affect larger donors. To reach the maximum deduction, an individual would need to donate just $5,000 annually, while married couples filing jointly would hit their limit at $10,000. These thresholds would not significantly impact middle-class donors, who typically give smaller amounts, but might influence giving among the state’s wealthier donors.
The state estimates this cap would save approximately $165 million in tax revenue. From a budgetary perspective, this represents funds that could be redirected to other state initiatives. However, from a nonprofit perspective, this figure represents potential donations that might never materialize if the tax incentive is reduced.
Donor Behavior and Strategic Giving
As financial advisors to nonprofits, we’ve observed how tax incentives influence donor behavior. Many donors work with financial planners to time their contributions strategically, often making larger lump-sum donations to maximize tax benefits. The proposed cap would fundamentally alter these calculations.
For example, without the incentive of a tax deduction, a giver may choose to stretch a large, one-time donation over several years. This change in giving patterns could lead to more consistent but smaller donations spread over time, rather than the larger one-time gifts many organizations rely on for capital campaigns or endowment building.
Disparate Impact Across the Nonprofit Sector
Not all nonprofits would feel the effects of this cap equally. Organizations that depend heavily on individual donations, particularly from major donors, would likely experience the greatest impact.
Smaller community-based organizations that rely primarily on modest donations might see less immediate impact. However, every nonprofit operates within an interconnected ecosystem of funding, and changes to one revenue stream often necessitate adjustments across all funding sources.
Federal Context and Compound Challenges
This proposed cap comes at a particularly challenging time. Many nonprofits already face uncertainty about federal funding alongside potential decreases in state-incentivized donations. Governor Healey herself has acknowledged this “evolving situation” of federal cutbacks, indicating some openness to revisiting the proposed cap.
The federal charitable deduction differs substantially from the state deduction. The federal deduction primarily benefits the ultra-wealthy, while 90% of Americans receive no tax benefits from their donations because they claim the standard deduction. The Massachusetts deduction, by contrast, has historically been more accessible to middle-class donors.
Planning for an Uncertain Future
As nonprofits prepare for the potential implementation of this cap, several strategic considerations come into focus:
- Diversification of Funding Sources: Organizations heavily reliant on individual donors should accelerate efforts to diversify their funding streams. This might include expanding grant applications, building corporate partnerships or developing earned income strategies.
- Donor Communication and Education: Transparency with donors about how their contributions are used becomes even more critical in this environment. Demonstrating clear impact can help maintain donor loyalty even if tax incentives decrease.
- Multi-Year Pledge Solicitation: With donors potentially spreading contributions over longer periods to work within annual caps, nonprofits should consider adjusting their fundraising appeals to emphasize multi-year commitments.
- Budget Conservation and Contingency Planning: Prudent financial management suggests building more conservative revenue projections and developing contingency plans for potential funding shortfalls.
Charting a Path Forward
The proposed cap represents a complex balancing act between state budget priorities and the vital community services provided by nonprofit organizations. Understanding these dynamics will be essential for nonprofit leaders navigating this evolving landscape while continuing to fulfill their missions throughout Massachusetts. As the state Legislature reviews the budget before the July 1 implementation date, nonprofit leaders should actively engage in advocacy efforts while simultaneously preparing their organizations for potential changes.
Michael Cecere, CPA, MST is a Partner and Julianne Schwallie, CPA, MBA is a Manager in the Nonprofit Practice Group at Gray, Gray & Gray, LLP, an accounting and consulting firm in Canton, MA.