Charitable Giving Took a Hit Due to Tax Reform
Why individuals were less generous in 2018 and what the future holds
Charities feared that the 2017 tax law would lead to a drop in charitable giving by individuals. The chief reason: the doubling of the standard deduction (to $24,000 for married couples filing jointly) would mean it wouldn’t pay for many to itemize on their 2018 tax returns, and without a charitable contribution deduction, they’d be less inclined to give. New data shows the fear seems to have been proven out.
Individual giving declined 1.1% in 2018 to $292.09 billion; it fell 3.4% adjusted for inflation, according to Giving USA 2019: The Annual Report on Philanthropy for the Year 2018. And giving by individuals decreased as a percentage of total giving from 70% in 2017 to 68% in 2018. Giving to religious institutions, which is done mostly by individuals — rather than foundations or corporations — also fell last year. (Total charity giving from foundations, corporations, bequests and individuals nudged up by 0.7%, to $427.71 billion in 2018, but declined by 1.7%, adjusted for inflation.)
The drop in individual giving was its first decline since 2013, and a strong reversal from the 5.7% increase in individual giving in 2017, according to the Giving USA report’s researchers at the Indiana University Lilly Family School of Philanthropy at IUPUI. (Giving USA is an initiative of Giving USA Foundation, which publishes data and trends about charitable giving.)
"Tax reform was a game changer for financial planning and tax planning. It requires planners have a conversation with clients about charitable giving."
“Typically, individual giving will track with growth in GPD [Gross Domestic Product], which was pretty robust in 2018, and with growth in household income, which was also strong,” said Rick Dunham, chair of the Giving USA Foundation. “The tax changes may be why individual giving was flat overall.”
Why Charitable Giving Fell in 2018
Of course, there may have been other reasons charitable giving by individuals fell in 2018. For instance, the stock market had a lousy year, making some people feel less able to donate to charities.
And no one knows for sure how big a role tax deductibility plays in someone’s decision to make a charitable contribution or how much to give. (Next Avenue is a nonprofit media site that receives donations from individuals.)
“That’s the $64,000 question,” said Pam Norley, president of Fidelity Charitable. (Fidelity Charitable is the nation’s largest donor-advised fund, a charitable-giving vehicle managing charitable donations for people and organizations.)
But, Dunham said, tax deductibility clearly has some effect on giving.
“An incentive to give will definitely increase giving, no question about that. For many, it may not be a matter of whether to give, it’s how much to give,” said Dunham. “If I know I’ll get a tax deduction, then, yeah, there’s a capability of giving more.”
Added Una Osil, associate dean for research and international programs at the Lilly Family School of Philanthropy: "Taxes are not the reason people give, but they affect the timing, the amount and sometimes the vehicles donors use to make those gifts."
The Effect of the Change in Itemizing Deductions
A June 2018 American Enterprise Institute report predicted a sharp drop in charitable giving by individuals due to the 2017 tax law, saying “four-fifths of this decline is driven by an increase in the number of taxpayers who claim the standard deduction.”
And the Tax Policy Center (of the Brookings Institution and the Urban Institute think tanks) estimated the law would cut the number of households itemizing deductions from about 37 million in 2017 to 16 million in 2018.
In a recent Fidelity Charitable survey, more than a third of financial advisers recommended that most of their clients adjust their charitable giving strategy post tax-reform. “Tax reform was a game changer for financial planning and tax planning," Norley said. “It requires planners to have a conversation with clients about charitable giving.”
What the Tax Changes Meant for High-Income People
It’s worth noting, said Eric Toder of the Urban Institute, that the loss of the charitable deduction “is not really affecting the highest-income givers very much, because they’re mostly still itemizing.” In other words, their write-offs (charitable contributions, property taxes, mortgage interest and more) exceed the new, higher standard deduction, so they claim them by itemizing.
As a result of the 2017 tax law, some high-income households gave — or gave more — using sophisticated tax-saving techniques such as donor-advised funds. These charity vehicles let them avoid capital gains taxes by donating stocks that had risen in value and claim immediate charitable deductions on the value of the donations.
And not all charities suffered declines in individual giving in 2018.
In interviews with Inside Philanthropy, numerous local charity executives reported an increase in donors and gifts last year. One factor, the article said: “an uptick in donors over 70 years old.” That’s because those people are allowed to make tax-free donations from their Individual Retirement Accounts (IRA); their other IRA distributions are taxable.
A Blip or a Trend?
The Giving USA researchers are curious to see whether the giving downturn in 2018 was a blip or part of a concerning trend. “It will be another year or two before we know the full impact,” Dunham said.
Osil, of the Lilly Family School of Philanthropy, noted: "Not knowing whether you can itemize could affect charitable giving. It certainly means fewer will benefit from the deduction, and it may affect the amounts, or level, they are willing to donate."
The Urban Institute’s Toder said he’s also watching 2019 charitable contribution trends for people who hadn’t known about the new write-off rules until they filled out their 2018 returns. “The changes may affect them more in the future than in the first year” of the change, said Toder.
Meantime, there’s a bipartisan effort on Capitol Hill — widely supported by charities and nonprofits — to let all taxpayers claim contributions if they donate, as is permitted in Colorado and Minnesota. In January, Rep. Chris Smith (R-N.J.) introduced legislation to do it, called the Charitable Giving Tax Deduction Act, co-sponsored by Rep. Henry Cuellar (D-Texas).
Said Steven S. Taylor, senior vice president and counsel for public policy of United Way Worldwide: “Congressman Smith’s bill would make the tax law fair for everyone who makes a financial sacrifice in order to help those in need.”
That bill isn't likely to become law soon, though. "Because it is still very much in debate, I don't think there is a clear direction" in altering the tax laws about charitable donations, said Osil.
Under the 2017 tax law, the old standard deduction/charitable contributions will return in 2025 unless Congress take action to prevent that.