How Tax Reform Affects Charitable Giving

Louis P. Barbarin, CPA, Chief Executive Officer, MMBB Financial Services

Welcome to our series of articles outlining tax reform and how the new tax law may affect your finances, both personally and organizationally. This first article focuses on charitable giving and how the changes in the standard deduction may affect how much individuals donate to charitable, religious and other non-profit organizations.

We’ll begin by looking at the new tax law. What is the new law?

The Tax Cuts and Jobs Act (H.R.1) signed into law by President Trump on December 22, 2017 overhauls America’s tax code in an attempt to revitalize our nation’s economy and deliver historic tax relief to workers, families, and local job creators.

What exactly is changing?

A key component of the new tax law doubles the standard deduction that approximately two-thirds of Americans use, to $12,000 for individuals and $24,000 for married couples. This means that significantly fewer Americans will be able to claim a charitable deduction because only those who itemize can claim the deduction. Taxpayers who itemized in the past may find it’s no longer beneficial for them to do so. They will find that the deductions which they were accustomed to taking, including for charitable giving, do not add up to as much as the new higher standard deduction which has increased by $6,000 for individuals and $12,000 for married couples. Some estimates project that as few as 10% of taxpayers will continue to itemize deductions on their returns, down from the current one-third. Additionally, those who continue to itemize will realize less of a tax savings due to the lower tax rates starting in 2018.

How might charitable giving be impacted?

With less tax incentive to give, millions of relatively small donations that moderate-income Americans give to mainstream charities could be sharply reduced. Despite the changes due to tax reform, Americans’ charitable instincts will still lead them to give, but they are expected to give less.

The good news is that members of religious congregations should continue to commit small amounts or a percentage of their income regardless of tax incentives. According to a recent study by the Chronicle of Philanthropy, the more important religion is a to a person, the more likely that person is to give to a charity of any kind. Among Americans who claim a religious affiliation, the study said, 65 percent give to charity¹. The tax benefits, while certainly helpful, are secondary to many givers in the faith community.

¹https://www.philanthropy.com/article/Religious-Americans-Give-More/153973