The Tax Cuts and Jobs Act (TCJA) significantly changed the nature of the tax deduction for charitable donations. But will it transform giving itself and the non-profits that rely on those contributions?
I recently spent the better part of a day listening to advocates for non-profits, researchers, and government officials discuss those critical issues. This is what I heard:
- The TCJA likely will accelerate a growing shift from low- and moderate-income contributors to a relatively small number of mega-donors, a trend that makes many in the non-profit sector very uncomfortable.
- That shift will create winners and losers among non-profits. Religious and social service agencies may see contributions drop while bigger colleges, hospitals, and high-end arts organizations are largely unscathed.
- The benefits of the charitable giving deduction may go well beyond its ability to reduce the after-tax cost of giving. The signal it sends—that charitable giving is a good thing—may be as important as the dollars donors save.
- There is a lot we do not know about what motivates givers, especially younger donors.
For all its importance, the TCJA did very little to directly change the tax treatment of donations. But several provisions are likely to have powerful indirect effects. By substantially increasing the standard deduction (to $12,000 for singles and $24,000 for joint filers) and by capping the state and local tax (SALT) deduction to $10,000 annually, the 2017 law sharply reduces the number of households who itemize their deductions. The Tax Policy Center estimates that the law cut the number of itemizers in 2018 from 46 million to 19 million.
Striking declines
The effects on those deducting charitable gifts are especially striking. TPC and other analysts estimate that the TCJA could reduce donations by roughly 5 percent. TPC projects that only 8 percent of households will take the charitable gift deduction in 2018, compared to 21 percent last year. Only 5 percent of middle income households will deduct their gifts in 2018. Last year, 16 percent did so.
Even upper middle-income taxpayers are far less likely to take the deduction post-TCJA. In 2017, three-quarters of those in the 90th to 95th income percentile (who made between about $220,000 and $315,000) claimed the deduction. After the TCJA, barely one-third will deduct their charitable gifts.
By contrast, deductions by those at the very top of the economic food chain are largely unaffected. Last year, about 90 percent of those in the top 0.1 percent (who made $3.3 million-plus) claimed the deduction. This year, 89 percent will take it, and their average deduction will be a bit higher than last year.
Mega-donors
One reason is that those mega-donors will continue to itemize. When you are deducting hundreds of thousands of dollars for various expenses, a low five-figure hike in the standard deduction simply does not matter.
But what will a charitable deduction that largely benefits only a handful of very high-income givers mean for the charities themselves? That’s harder to know, but many non-profits are worried.
True, a $1 million non-profit could make its annual budget with a single very generous gift. But there are costs to such a model.
One is that a sole big giver would have enormous influence over that charity’s priorities, a situation that may not best serve its community.
Another is that a tax system that subsidizes mostly large givers may discourage younger, smaller contributors from engaging with non-profits. It is axiomatic that today’s $100 contributor may become tomorrow’s $1,000, or $10,000, giver. And without those small givers, non-profits worry about where the next generation of donors will come from.
Disappearing givers
Recent studies show that the number of small givers has been declining for years. Indiana University found that from 2000 to 2014, the share of US households who donate at least $25 to charity fell from 65 percent to 56 percent, mostly due to a decline in low- and moderate-income contributors. While the total value of gifts is rising, the number of donors is falling.
What role do tax subsidies play? That’s hard to know. Even before the TCJA, barely one in five households claimed a deduction for their charitable gifts. Among those with expanded cash income of less than $50,000, far fewer did. Yet, even without the subsidy, many gave anyway. And many stopped giving even before the tax subsidy was cut.
Still, the deduction seems to increase giving. The signal it sends, that society values charitable donations, may be as important as the dollars themselves. If so, how will millions of donors respond to the message Congress has sent by eliminating their tax break?
Some experts suspect many taxpayers—unaware of the TCJA’s changes-- will keep giving in 2018, only to learn next April that by claiming the standard deduction they will lose the tax benefit of their donations. Then, what will they do in 2019? We will get to observe a fascinating natural experiment, though the nation’s non-profits would rather not be part of it.
