Your Money, Your Future
Your Money, Your Future

Tax reform could reduce charitable giving by up to $13 billion per year

Key Points
  • Trump's latest tax-reform proposal calls for keeping the deduction for charitable giving.
  • Even with a charitable deduction, an increase in the standard deduction and a decrease in the top marginal tax rate would reduce charitable giving by up to $13 billion annually, according to new research.
  • Generally, you can deduct up to 50 percent of your adjusted gross income in charitable contributions, but deductions can be limited to 20 to 30 percent in some cases.
Charitable giving and capital gains

The charitable tax deduction has been a part of the U.S. tax code for a century. During last year's U.S. presidential campaign, then-candidate and now President Donald Trump proposed capping the deduction for wealthy taxpayers but backed off that idea in his latest tax plan.

Yet tax reform could reduce donations even if capping charitable deductions isn't part of current proposals from the White House and Republican lawmakers.

A doubling of the standard deduction and cutting the top tax rate to 35 percent, from nearly 40 percent, would reduce charitable giving by up to $13 billion annually, according to new research by the Indiana University Lilly Family School of Philanthropy. The analysis was commissioned by Independent Sector, which is a coalition of nonprofits, foundations and corporate giving programs.

"On the margins, we see charitable giving respond to tax incentives, even with giving to religious organizations," said Patrick Rooney, associate dean for academic affairs and research at the IU Lilly Family School of Philanthropy, who worked on the analysis.

Here's a comparison of how charitable deductions are treated under current law, Trump's latest tax plan, the House Republicans' blueprint and the 2014 Tax Reform Act proposed by former House Ways and Means Committee Chairman Dave Camp:

Under current tax law, you can deduct charitable contributions of money or property made to qualified organizations if you itemize your deductions. Generally, you can deduct up to 50 percent of your adjusted gross income in charitable contributions, but deductions can be limited to 20 percent to 30 percent of your income in some cases.

Lowering the top tax rate would mean that a charitable deduction would be worth about 35 cents on the dollar under tax reform if the rate is cut to 35 percent, compared to 40 cents on the dollar now.

Increasing the standard deduction under tax reform would mean that there would be a higher hurdle to claim the charitable deduction. Why? Because you have to itemize in order to earn that tax break. Currently, only about 30 percent of taxpayers itemize their returns.

To be sure, $13 billion is less than 4 percent of the $373.25 billion Americans gave in 2015 to charity, according to the Giving USA Foundation. "The magnitudes that [the researchers] are talking [about] are not particularly big," said Scott Greenberg, an analyst with the Center for Federal Tax Policy at the Tax Foundation.

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Tax reform is a moving target. Republican lawmakers in the Senate have yet to unveil details for how they will approach any changes. A recent Quinnipiac University poll shows poor support for Trump's tax plan. And Goldman Sachs is worried that Wall Street is too sanguine about the prospects of tax reform given the legislative uncertainty.

This is not the first time charitable giving has been threatened by tax reform. President Barack Obama tried to cap the charitable deduction for high-income taxpayers in his budget proposals during the later years of his administration but failed to get any traction in Congress.

"Charitable giving is a small piece of a much bigger puzzle," said Eugene Steuerle, a fellow at the Urban Institute who has researched tax policy and its effects on charities. "Giving might go down under tax reform, but it is not going to be wiped out."

Worried about how tax reform might affect your giving? Financial advisors recommend you accelerate your donations now to get a bigger tax benefit or use a donor-advised fund that allows you to make a charitable contribution, receive an immediate tax break and then recommend grants from the fund to your favorite charities over time.