Many people have looked forward all year to seeing what impact the new tax laws will have on their 2018 tax returns. With lower tax rates, higher standard deductions, and a host of other important changes, there will be many winners -- and some losers -- from the tax reform measures that lawmakers passed in late 2017.
Yet there's one group that's highly concerned about potential unintended consequences of tax reform. Nothing happened to change the itemized deduction for charitable contributions, but the increase in the standard deduction has charitable organizations worried that if taxpayers don't get any additional benefit from itemizing, they won't have the same financial incentive to keep giving money. That in turn could wreak havoc with charities' budgets.
Donations to charity and your taxes
For years, the federal government has rewarded those who make donations to charitable organizations that have passed IRS muster. Those organizations that demonstrate a commitment to a religious, education, scientific, or literary purpose can apply with the IRS for tax-exempt status as what's known as a 501(c)(3) organization. That enables most donors to write off their donations as itemized deductions, with generous maximum limits of 50% of adjusted gross income for the vast majority of taxpayers.
Traditionally, that's been a huge incentive to get people to give. In 2016, the most recent year for which IRS data is available, nearly 37 million taxpayers included charitable donations on their schedule of itemized deductions. Those gifts approached $234 billion in total, working out to an average deduction of $6,332 per return.
When you look closely at exactly how people donated, more than two-thirds of deductible donations came in the form of cash or a check. That left just a third to come in the form of other gifts. That includes not only in-kind gifts of non-perishable food items, apparel, or automobiles, but also gifts of stock and other appreciated investments. The benefit of simple cash gifts is that there's very little documentation required, whereas in-kind gifts require anything from a simple acknowledgment from the charity in question to a formal appraisal for large donations.
The concern for charities in 2018 and beyond
None of tax reform's provisions directly changed any of the rules governing deductions of charitable gifts. However, what did change was the likelihood that as many people will itemize their deductions as did in the past. Those who don't itemize effectively get no tax benefit from their charitable deductions.
People are less likely to itemize because tax reform boosted the standard deduction. For joint filers, the old standard deduction of $12,700 in 2017 rose to $24,000 in 2018. Therefore, those who itemized in 2017 because their charitable gifts and other deductible expenses totaled more than $12,700 won't do so if they weren't anywhere close to the $24,000 level.
In addition, some other itemized deductions were limited or eliminated. The biggest change came from the new $10,000 ceiling on state and local tax deductions, which will particularly affect those living in high-tax areas of the country. The elimination of miscellaneous itemized deductions and new, lower limits on certain mortgage interest deductions will further reduce the likelihood that taxpayers will have itemized deductions in excess of the standard deduction.
Charities are already bracing for the impact, although there are some signs of hope. The Tax Policy Center estimates that only 15 million taxpayers will benefit from tax breaks for charitable giving, down by more than half since 2016. Yet early numbers show that people are still giving, with a report from the Urban Institute showing that as of the beginning of October, giving was actually up 2.6% year over year according to a report from the Fundraising Effectiveness Project. Gifts from high-income donors helped to offset declines in smaller giving. That makes sense, given that those with higher incomes are most likely to still get the benefit of itemizing because of high levels of other deductible expenses.
Will you give?
Getting a tax break isn't the only reason why Americans give to charity, and for most, it's not even the primary reason. Yet until the final numbers come in, charities will be nervous that the millions of donors who will no longer be able to get the benefit of a deduction of more than $6,000 on their tax returns might decide to cut back on their giving.
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