The tax law Republican lawmakers passed in 2017 could affect how much Americans give as they weigh making end-of-year donations.
Contributions from individuals, as opposed to corporations or other organizations, make up more than three quarters of all donations in the United States. Charities received more than $400 billion from individuals in 2017, the last year before the policy was implemented.
Hard data on the true impact will not be available until after this year’s taxes are filed in April 2019, but “unquestionably, charitable giving is going to go down,” said Hadar Susskind, senior vice-president of government relations at the Council of Foundations, a nonprofit association of foundations and corporations that funds grants.
While altruism will continue to be the greatest motivation for many Americans to keep giving, the changing tax incentive is likely part of their calculus, too. Here’s what you need to know.
What is changing?
The way charitable donations are calculated as a tax write-off has not changed, but the new law makes it more difficult for people to reach the threshold required to qualify for a charitable write-off.
Each year, Americans must decide whether to take what is called a standard deduction—a set amount—or to itemize their deductions. Typically, taxpayers choose whichever is higher and gives them a better tax break.
Before the most recent changes to the tax code, about 30 percent of Americans itemized, according to the Tax Foundation. That number is likely to drop this year because the standard deduction has doubled from $6,000 to $12,000 for individuals and from $12,000 to $24,000 for couples.
Taxpayers who itemize can still deduct up to 50 percent of their adjusted gross income with charitable contributions.
But several other deduction limits did change. The law imposed a $10,000 cap on claims for state and local tax deductions. Single taxpayers are now generally allowed to deduct interest paid on mortgage debt of up to $750,000, down from $1 million under the old law. Mortgages that existed before Dec. 14, 2017 are grandfathered in.
Those drops, combined with the increase in the standard deduction, make it harder for taxpayers to have itemized deductions that are larger than the standard deduction, said Manoj Viswanathan, a tax expert at the University of California, Hastings College of Law. As a result, “far, far fewer people are going to itemize.”
The Council on Foundations predicts between 5 percent and 12.5 percent fewer Americans will itemize because of the changes.
On the other hand, the tax law could provide high-income earners more incentive to donate. The Pease limitations, which put tighter restrictions on how much named high-income taxpayers could deduct on a number of items including donations, were repealed.
How will charitable organizations be affected?
The Council of Foundations estimates the tax overhaul could decrease charitable giving by up to $24 billion annually.
Even though tax deductions are based on donations made throughout the year, charities are expecting to see a larger impact now, at the end of the year, when many donors typically make bigger gifts because of the holidays and the tax deadline.
Nonprofits such as colleges and hospitals that receive much of their funding from wealthy donors are less likely to feel the changes of the new tax law because wealthy people will likely still have the incentive of itemizing their deductions.
But organizations that usually rely on small donations from middle-income donors, like houses of worship, social services and basic-needs charities, might see a bigger drop in contributions because their donors are more likely to take the standard tax deduction, Susskind said.
“What we see playing out in 2018 so far is right in line with what academics and economists have predicted,” said Steve Taylor, senior vice president and counsel for public policy at United Way.
So far, the number of middle-income donors and the size of the donations United Way usually receives has decreased this year, according to Taylor.
It is important to note that most people aren’t solely motivated to give by saving money on taxes. About 56 percent of American households donated in 2015, the most recent year for which data is available, but only a third itemized their taxes. That means for at least a fourth of Americans, tax benefits are not the reason they donate.
A recent survey found that even among high net-worth households, tax incentives were not generally “a prime motivation for giving.” Only 17 percent of wealthy donors were “always” motivated to give because of tax benefits.
Nevertheless, tax incentives affect “the amount households give, the timing, and the vehicle that households use to give,” said Una Osli, associate dean for research and international programs at the Lilly Family School of Philanthropy.
How should you plan your charitable giving?
Under the new laws, Osli recommends people “start with the causes and charities that they want to support and think about what their budget is around charitable giving.” Then consider your goals and timeframe, she said.
For people who traditionally itemize their taxes but may no longer be able to reach the threshold necessary for a charitable write-off, “bundling,” or “bunching”—giving every few years or every other year, instead of yearly—may be a suitable solution. Another way to “bundle” donations is through donor-advised funds. The funds are investments that can grow tax-free. Donors get the tax benefit from their initial deposit, but the money in the fund can be directed to qualified charities at anytime.
For state income taxes, some local and state governments also have workarounds where residents can make donations to state charitable gift trust funds in order to receive state tax credits.
For example, earlier this year, the New York state government set up a state-administered charitable trust fund that accepts donations to improve public education, health care and other public services. Taxpayers can receive a credit against their state income taxes equivalent to 85 percent of their contribution to the fund.
After considering all the pros and cons, if you decide to change your donation habits, Susskind suggests staying “in close communication” with the organizations to which you regularly donate so the groups can budget for the year ahead.
Correction: This story has been updated to indicate the new tax law created a cap on state and local tax deductions. A previous version incorrectly stated there was a previous cap that had been lowered.