For charitable giving, ’tis the season… But will it still be, post-TCJA?

“Why do we give?” I asked my sixth-grader, after he delivered gifts we’d purchased for his school’s holiday wish program.

“Well, because we can. And some kids don’t have anything and might be going through a rough time. It feels good to help them.”

He’s right of course — it feels very good to help when you can. And Americans think it’s a good thing to do. A 2015 survey by the Philanthropy Roundtable found that 86 percent of voting-age Americans think it’s important to continue to give money and time to charities.

Is feeling good, for goodness’ sake, the only reason? The tax code has been giving taxpayers an extra reason to feel good when they give since 1917, when it started allowing taxpayers who itemize to deduct their charitable donations from taxable income. 

But the Tax Cuts and Jobs Act (TCJA) will significantly reduce the number of itemizers, and thus the number of households who will claim a tax benefit for their charitable gifts. By increasing the standard deduction to $12,000 for individuals and $24,000 for couples and by capping the benefit of the state and local tax (SALT) deduction, the TCJA will dramatically reduce the number of households who will benefit from the tax incentive for giving. 

The Tax Policy Center estimates that post-TCJA only 8 percent of all households will take the charitable gift deduction in 2018, compared to 21 percent last year. And, the share of middle income households who will deduct their gifts will fall from 16 percent last year to five percent this year. 

As a result, TPC and others expect charitable donations could drop by as much as 5 percent . However, there is a complication: Some experts think many taxpayers are unaware of TCJA changes and thus will remain as charitable as ever in 2018. But they’ll have a rude awakening when they file their tax returns by next April and see they do not qualify for a tax deduction.  Perhaps they will respond by giving less next year. 

All of this keeps nonprofit organizations up at night. And I wonder what role tax subsidies play in a person’s decision to give. There is a lot we don’t know about what motivates givers…  like me or my friends. 

So in an unscientific survey, I posed three questions on Facebook over three days during the week of Giving Tuesday. I heard from 38 friends, 11 of whom are single and nine of whom are men. They range in age between 40 and 70, but most are in their 40s. I estimate that they are evenly split between middle- and upper- income households.

On the Sunday before Giving Tuesday, I asked if they thought about the impact their donation has on their annual tax bill. Of 25 who answered, 16 said no and 9, or one-third, said yes. One friend answered quickly, “With the new tax code most donations won’t even play a part in taxes anymore.”

Another reminded me of the nuances involved. “When a friend is raising money for… a personal project… I am not imagining what the bottom line will be on my tax bill.” But if a donation is for the American Red Cross during a crisis, she said, “I don’t hesitate to make the donation because I know it’s both for a good cause AND tax deductible.”

One day before Giving Tuesday, I asked if losing the itemized deduction will change the way they give. Of nine friends who answered, six said they would not change their giving habits while three, or one-third, said they would. 

On the day after Giving Tuesday, I asked if my respondents still plan to itemize for 2018. Of 15 friends who answered, eight said they will itemize, six said they would not, and one was not sure. 

One friend wondered what would happen to the amount that mega-donors give, “since they likely get more from big donations than I do from my relatively small ones.” And, she added, what about lower-income givers?

Good questions. (I have good friends.) The answer is that the TCJA will make little difference to either very low-income givers or very high-income mega-donors. 

Almost none of the lowest-income households, those making less than $25,000, itemized before the TCJA so the loss of the charitable itemized deduction won’t really affect them. They still may give to charity, but not because of tax policy.

It is the opposite story for the biggest givers. TPC estimates that the only income group whose tax benefits for charitable giving stay approximately the same post-TCJA are those in the top 0.1 percent of the income distribution (who make $3.3 million or more annually). Nine of out 10 claimed the deduction last year and roughly the same share will do so this year. After all, if you can afford to give $1 million to the opera, a standard deduction of $24,000 won’t reverse your choice to itemize. The average size of a super wealthy person’s gifts won’t change much either.

But since evidence does seem to suggest that the tax incentive increases giving, and since its very existence signals that giving is a good thing, maybe the incentive could be more broadly available—and encourage all of us to give, no matter our income. My TPC colleague Gene Steuerle has suggested allowing everyone–including non-itemizers—to take a charitable deduction, as long as they give more than a certain share of their adjusted gross income. I like that idea.

In the meantime, if my friends are typical, many taxpayers may have made a habit of giving and will continue to do so. But about a third of my friends say losing the tax incentive may change their giving practices. My survey was small and unscientific but still worrisome for charities.  Will people still give? Or give as much? Will they be disappointed if their stack of receipts for charitable donations does not generate a tax deduction? 

As my son might say, people feel good when they give, so feeling better about feeling good is a nice “extra.” If everybody could get the “extra” tax benefit, maybe nobody would stop feeling good.

Happy holidays.

The Tax Hound, publishing once a month, helps make sense of tax policy for those outside the tax world by connecting tax issues to everyday concerns. Have a question or an idea? Send Renu an email.