New Tax Laws Threaten Charitable Giving, Leaving Gap for Everyday Donors
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A recent analysis indicates that changes to US tax law risk considerably reducing charitable donations from wealthy individuals, possibly shifting the burden of philanthropic support to less affluent Americans.
New tax legislation, signed into law in July, is poised to reshape the landscape of charitable giving in the United States. several tax benefits previously enjoyed by high-income donors are being reduced, with top earners facing a cut in their effective tax benefit from 37% to 35%. The Indiana University Lilly family School of Philanthropy estimates these changes alone could lead to a decrease in annual giving ranging from $4.1 billion to $6.1 billion.
Impact on High-Income Donors
The new law also limits tax incentives for those who itemize deductions,allowing them to only deduct donations exceeding 0.5% of their adjusted gross income. This change is expected to disproportionately affect wealthier taxpayers who traditionally rely on itemized deductions to reduce their tax liability.
“That 2-percentage-point reduction [for top earners] might not seem like a big deal, but you have to keep in mind the scale of gifts that are being given among the highest-net-worth individuals in the United States,” one analyst noted.
A Boost for Middle and Lower-Income Filers?
While the legislation curtails benefits for the wealthy, it simultaneously introduces incentives for middle- and lower-income taxpayers. Starting next year, approximately 140 million non-itemizers will be able to deduct up to $1,000 in cash donations annually. This provision aims to broaden the base of charitable giving, notably as roughly 90% of taxpayers currently take the standard deduction, a figure that has risen as the 2017 tax reforms.
However,experts express skepticism that increased giving from these groups will fully offset the anticipated decline in donations from high-income earners. Elena Patel, co-director of the Urban-Brookings Tax Policy Center, stated she is “not optimistic that middle- and lower-income donors will be able to make up the shortfall as top earners give less.” She explained that while incentivizing small donations is valuable, these contributions are unlikely to match the magnitude of gifts from the wealthiest donors. “Everybody should give like this, and we change some of these people’s giving behavior. Somewhere out there is the Bill Gates of tomorrow.”
Strategic Giving in a Changing Tax Landscape
Taxpayers planning to take the standard deduction may benefit from delaying donations untill 2026, while itemizers and high-income donors may find it advantageous to give before the end of the current year. Robert Westley, a regional wealth advisor at Northern Trust, is advising clients planning to donate over the next four years to accelerate those donations this year.
Currently, filers can deduct up to 60% of their adjusted gross income for cash donations, falling to 30% for contributions of long-term assets like stock. Excess deductions can generally be carried forward for five years, though clarity is still needed from the IRS regarding how the new deduction limits will apply to these carried-forward amounts.
Westley recommends considering donor-advised funds (DAFs) for those seeking to maximize their tax benefits. DAFs allow donors to receive an upfront deduction while deferring the allocation of funds to specific charities. Donating appreciated stock to a DAF can also be a tax-efficient strategy, particularly given this year’s stock market performance.
“Their equities have appreciated, and some of them might now represent a higher percentage of the portfolio than their target asset allocation,” Westley explained. “When you donate those risk assets to charity, you get the tax benefit, you don’t realize the gain, and when it’s done you’ve lowered your risk-asset allocation.”
For high-income earners aged 73 and older, utilizing required minimum distributions (RMDs) from an IRA to make charitable donations can be a particularly effective strategy, effectively reducing taxable income dollar-for-dollar. This tactic is expected to become even more popular with the increased SALT cap.
Lawyers and tax planners are awaiting further guidance from the IRS on several outstanding issues, including the application of deduction caps to non-grantor trusts. despite these uncertainties, high-income donors still have a range of tools available to optimize their charitable giving strategies.