How Has the New Tax Reform Affected Charitable Giving?

People typically do not donate to charity just because of the tax benefits, but without it they’re likely to give less.  Charitable organizations are critically important in our society and understanding how the new tax reform may affect charitable giving is key to many organizations continued survival.

CNBC’s recent article, “Charitable contributions take a hit following tax reform,” reports that 2018 was the first time the effect of the new tax law could be gauged. The law eliminated or significantly reduced the benefits of charitable giving for many would-be donors.

In total, individuals, bequests, foundations and corporations donated roughly $430 billion to U.S. charities in 2018, according to Giving USA. However, while the giving by individuals dropped, contributions from foundations and corporations went up.

Even though the deduction for donations was unchanged in the Tax Cuts and Jobs Act, individuals still are required to itemize the donation to claim it. That is now a much higher bar, because of the nearly doubled standard deduction.

Under the new tax reform legislation, total itemized deductions for charitable giving must be more than $12,000, which is the new standard deduction. That is an increase from the past $6,350 standard deduction for single people. Married couples need deductions exceeding $24,000, which is an increase from $12,700.

Because of this change, there will be fewer people who itemize their individual tax returns. The result is that many people will not enjoy the tax benefits of their charitable contributions.

One analysis from the Tax Policy Center showed that the number of people who itemize their taxes fell from to about 19 million under the new tax law. That is a decrease of more than half, from about 46 million. At the same time, lower tax rates also reduced the marginal benefit of giving, the Tax Policy Center said.

Tax reform probably impacted the middle households that used to itemize the hardest, one tax analyst remarked. As a result, lower-income families reduced giving, a change that could be an issue for non-profits in the long term. The greater the revenue is concentrated in only a few sources, the greater the risk for these charities to not receive the donations needed to continue to carry out their important missions.

Another study from the Fundraising Effectiveness Project revealed that there was a nearly 3% increase in large gifts, defined as $1,000 or more in 2018. However, modest gifts between $250 and $999 dropped by 4%; and gifts under $250 decreased by more than 4%. In addition, the total number of donors declined.  Charitable giving is important regardless of the tax benefits, and being well-informed regarding the changes may help you properly plan your donations and maximize deductions.

Reference: CNBC (June 18, 2019) “Charitable contributions take a hit following tax reform”