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Could charitable giving become a tax law casualty?

Key Points
  • People don't necessarily give to charity because of the tax benefits, but it doesn't hurt.
  • Here's an early look at how the new tax law is impacting charitable contributions.
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Holding back on giving

People don't necessarily give to charity because of tax benefits, but it doesn't hurt.

However, the new tax law, among other things, has eliminated or sharply reduced the benefits of charitable giving for many would-be donors.

Even though the deduction for donations is unchanged, you still need to itemize to claim it, and that's a much higher bar with the now nearly doubled standard deduction.

Under the new law, an individual will need total itemized deductions to exceed $12,000, the new standard deduction for individual taxpayers, up from the former $6,350 standard deduction. Married couples would need deductions exceeding $24,000, up from $12,700.

As a result, fewer people will likely itemize this year, which means many won't reap the tax benefits of their charitable contributions.

One analysis from the Tax Policy Center found that 21 million taxpayers will stop taking the charitable deduction under the Tax Cuts and Jobs Act. Not only did the number of taxpayers itemizing shrink, but lower tax rates reduced the marginal benefit of giving, as well, the Tax Policy Center said.

Troubling signs

That could put a damper on some people's charitable spirit.

That's particularly troubling for grassroots charities such as the Community Partnership School, a brand-new independent school located in one of Philadelphia's most disadvantaged neighborhoods.

Student enrollment is made possible almost entirely by charitable donations, which cover about 95 percent of the school's operating budget.

"Whether it's $1 million or $10 — it all matters, that's how we fund the school," said Eric Jones, the head of school.

Eric Jones Community Partnership School's Head of School answering questions from students.
CNBC

The average donation is in the $500 range, Jones said, which is not uncommon for smaller nonprofits. Those are also the gifts that could be hardest hit going forward.

Early numbers for 2018 show a near 3 percent increase in large gifts, defined as $1,000 or more. But modest gifts between $250 and $999 fell by 4 percent and gifts under $250 dropped by more than 4 percent, according to the Fundraising Effectiveness Project's 2018 fourth-quarter report.

Of course, people don't give to charity just to get a tax deduction. And there is a way for smaller donors to preserve the tax advantage of their donations, despite the new, higher standard deduction.

With a strategy called "bunching," you can save money over time and donate every two or three years instead of every year.

Under the new tax law, charitable giving is a relative bright spot for donors who itemize.
Kim Laughton
president of Schwab Charitable

One way to accomplish this is with a donor-advised fund, which lets you make a charitable contribution and receive an immediate tax break for the full donation, and then recommend grants from the fund to your favorite charities over time.

For example, instead of giving $5,000 to charity annually, accelerate the gift by giving $10,000 every two years. This way, you may get your itemized deductions over the limit one year and take the standard deduction the next.

In fact, more clients are using donor-advised funds now for just this reason, according to Kate Kennedy, a certified financial planner and partner at Cerity Partners in Chicago. "It's one of the few things we can control as far as the tax benefit," she said.

Schwab Charitable, a provider of donor-advised funds, reported a record $2.2 billion in grants to charities in 2018 — a 35 percent increase from the previous year. That means that, through the end of last year, donors continued to contribute to their donor-advised fund accounts and then recommend grants to the charities of their choice.

Fidelity Charitable similarly reported a record $5.2 billion in grants in 2018, a 17 percent increase over 2017.

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"Under the new tax law, charitable giving is a relative bright spot for donors who itemize because the charitable deduction was preserved while several other popular deductions were capped or eliminated" said Kim Laughton, the president of Schwab Charitable.

However, on closer look, the total number of contributions went down year over year while the dollar amounts went up, Laughton said, which means those gifts came from fewer — and richer — givers.

"The wealthier folks are continuing to give," Laughton said. "The charitable deduction is still a powerful tool at their disposal."

"We'll have wealthy people giving a lot and people of modest wealth giving less, and I don't think that's a good trend," said Eileen Heisman, the president and CEO and the National Philanthropic Trust. "We're going to have a big division of the haves and have-nots."