howard gleckman is a senior fellow at the Urban Institute, where he is affiliated with the Tax Policy Center.
Illustration by Richard Borge/theispot
Published February 27, 2018
You may be forgiven if you don’t know how the Tax Cuts and Jobs Act, the massive tax law overhaul Congress passed in a hurry in December, will affect charitable giving. But crunching the numbers with a computer simulation does yield some fairly definitive figures.
The TCJA is expected to cut giving by about 5 percent, or $15 billion, in 2018. Most of the decline in tax-motivated gifts is likely to occur among middle- and upper-middle-income households for reasons that are easily understandable once you drill down to the law’s provisions. Moreover, the impact is likely to be disproportionately felt by social welfare non-profits such as food banks.
The new law doesn’t directly reduce the tax benefits for giving to charity, and in fact includes one provision that makes big gifts by the wealthy more attractive to donors. But it contains several elements that probably will reduce the size of the gifts that Americans near the middle of the income distribution give to non-profits.
The two big changes: a new cap on the amount of state and local taxes that households can deduct from their federal taxable income and a big increase in the federal standard deduction to $24,000 for couples filing jointly and $12,000 for singles. Combined, the two changes are likely to more than halve the number of Americans who itemize their federal tax deductions (and thereby get a tax break from giving), from more than 40 million to only about 19 million.
It is a matter of simple math. Take a couple who, starting this year, has the option of taking a standard deduction of $24,000 in lieu of itemizing. They add up their charitable gifts, and the maximum allowable $10,000 paid in state and local taxes (plus allowable mortgage interest, and other smaller or less common deductions). If the total is $24,000 or less, they will simply take the standard deduction.
Note the consequence. Until 2018, if an itemizer in the 25 percent tax bracket gave a $500 gift to the local homeless shelter, their after-tax cost was only $375. Now, if the itemizer switches to the standard deduction, the after-tax cost of the gift will be the full $500.
The new law will reduce the federal subsidy for charitable gifts – that is, the loss of tax revenue associated with the deduction – from about $63 billion to $42 billion.
The Tax Policy Center estimates the number of Americans taking itemized deductions for their charitable gifts will fall from about 37 million to only about 16 million. Among middle-income households, the percentage taking the charitable deduction will fall from nearly 15 percent to less than 5 percent. Overall, the new law will reduce the federal subsidy for charitable gifts – that is, the loss of tax revenue associated with the deduction – from about $63 billion to $42 billion.
This doesn’t mean that people will stop giving. Avoiding tax is not the only reason people contribute to charity. After all, before the new tax law, about 70 percent of U.S. households took the standard deduction and got no tax benefit from their gifts. But they gave anyway. The new non-itemizers will likely continue to give, but they are likely to contribute somewhat less without the tax break.
Middle- and upper-middle-income households will probably be affected the most. Lower income people rarely itemized under the old law and won’t be affected by the TCJA’s changes. And the very wealthy will hardly notice the boost in the standard deduction since they are likely to continue to itemize despite the change.
Besides, the very wealthy are more likely to give to charity for reasons other than the income tax deduction. Their motivations: reducing estate taxes (which the new law retains), a belief they can influence the mission of the non-profit, or public recognition such as getting their name on the local hospital or museum.
The new law may also change the patterns and timing of gifts. Financial advisers are already suggesting that people “bunch” their gifts by giving more in one year (and itemizing) and then giving much less the following year and taking the standard deduction.
An easy way to do that is through the use of donor-advised funds. These accounts, usually run for a fee by investment firms or community foundations, allow people to make significant tax-deductible gifts to their funds and then distribute the money to their favorite charities across multiple years.
Imagine a couple pays $7,000 in mortgage interest, deducts the $10,000 maximum in allowable state and local tax, and makes $5,000 in charitable gifts. Their total itemized deductions total only $22,000. Thus, they are better off taking the $24,000 standard deduction. But that means they receive no tax benefit for their gifts to non-profits.
Instead, they could give $10,000 to their donor-advised fund in 2018, boosting their total itemized deductions to $27,000 – enough to make it pay to itemize. Then, in 2019, they make no new gifts to the donor-advised fund and take the standard deduction. But they can continue to give to their favorite charities, using their 2018 contributions to the investment fund.
These funds are not for everyone. You need to be willing to pay the fees (often exceeding 1 percent of the assets annually), you may not be able to give to every charity you like, and you must have the extra cash to give in the first place. Most funds require minimum contributions of $1,000 or more.
How will all this affect charities themselves? Large cultural institutions, such as art museums and orchestras, already receive most of their dollars from a relatively small number of big givers. And one can assume their contribution rates won’t go down since they rarely took the standard deduction in the past and won’t in the future. Indeed, there’s a chance their contributions will rise since the big cut in corporate income taxes will make the rich richer.
Executives at non-profits worry about a decline in giving by the middle class. And this seems especially acute among social service charities. Indeed, the secondary social impact may be at least as significant as the immediate financial effects on non-profits. One reason social service charities work so hard to solicit modest contributions from middle-income households is that the act of giving often leads donors to identify with the cause through volunteering, fund-raising, or voting. This is especially important at a time when government funding for social services is under threat. If millions of Americans do indeed give less or (or nothing) to charities, we will all be the worse for it.