How tax reform could hit charitable giving
Posted August 6
Plenty of factors can motivate charitable giving: Moral obligation, religious tithing, a desire to improve the world or leave a legacy.
But another factor -- the tax benefits for giving -- could soon change if lawmakers push through tax reform.
Few people donate simply because of the tax breaks and are unlikely to stop giving altogether if they don't get any. But analyses from the Congressional Budget Office and others have found that tax incentives typically increase how much you choose to donate -- whether in life or at death.
That's why Republican proposals to reduce or eliminate key tax breaks for giving has charity experts a little concerned. Specifically, President Trump and House Republicans have proposed to nearly double the standard deduction, lower income tax rates and repeal the estate tax.
Though it's assumed the charitable deduction would remain in place, increasing the standard deduction would mean far fewer people would itemize and be able to claim the break, while lowering tax rates would make the deduction worth less for those who still take it.
Related: The deductions that could be killed by tax reform
The double whammy of doubling the standard deduction while lowering the top rate to 35% from 39.6% could reduce giving by between $5 billion and $13 billion a year, or up to 4.6%, according to a recent study by the Lilly Family School of Philanthropy at Indiana University.
Of those two changes, increasing the standard deduction has the greatest negative effect because it would reduce those who itemize to just 5% of filers, down from 30% today. That's because the only reason to itemize is if your deductions combined exceed the value of the standard deduction.
"The 25% who used to itemize will probably give some but not as much," said David Thompson, vice president of policy at the National Council of Nonprofits.
How much does it save
Here's how the charitable deduction works:
If you itemize deductions, how much you save in taxes from your contributions is determined by your top income tax rate. If, for example, you're in the 28% bracket, you'll save $28 in taxes for every $100 you donate.
And if you are fortunate enough to have an estate worth more than $5.5 million (or $11 million for married couples), anything above those amounts would be subject to the federal estate tax after you die. Whatever you give in your lifetime or bequeath to your heirs upon death can reduce that taxable portion.
Related: The most controversial tax reform proposal has been nixed
Many charity groups have urged lawmakers to make the charitable deduction "universal" -- meaning everyone can take it whether they itemize or not. "Our nation has a rich history of charitable giving. By making it a universal deduction we think that it recognizes this important value," said Sean Parnell of The Philanthropy Roundtable.
The Lilly Family School study estimates such a change would increase donations -- by between 0.4% and 4.3% -- depending on what other reforms are made.
While lawmakers are giving the proposal "very serious look," according to The Hill, a universal deduction would cost the federal government money -- between $191 billion to $515 billion in lost revenue over a decade, the Tax Foundation estimates. And Congress will be hard up for cash if they manage to pass even half of the tax cuts Republicans want.
Repealing the estate tax is also likely to hit giving, but it's unclear by how much. Various studies over the years have estimated that repeal could reduce bequests anywhere from 6% to 37%.
Still, some people might actually give more in the wake of repeal. Today, a very wealthy person engaged in estate planning has to decide how much he wants to give to family, how much to charity and how much to government, said economist Patrick Rooney, who worked on the Lilly study.
Once the government bucket is removed, it leaves more money for the other two. "If they have a larger estate because less is going to the government, then they may be inclined to gift more to charity," said Elda Di Re, a partner in private client services in the tax department at EY.
Either way, though, income tax rates will influence current behavior more than the estate tax repeal, Di Re added. "People don't know when they will die, and don't know what the rules will be [when they do], so they would be less inclined to change their estate plans."