Tax reform’s impact on charitable donations

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Many charitable organizations have spent much of 2018 worrying over how the Tax Cuts and Jobs Act of 2017 could affect taxpayers’ eagerness to continue giving.

Tax reform led to minimal change in the charitable giving deduction, which taxpayers can take only if they itemize. But the law substantially increased the standard deduction, which could mean fewer people will itemize.

The question facing charities is: Will taxpayers continue to donate even if they won’t be able to take a deduction for their generosity?

New research by Fidelity Charitable, a public charity that operates a donor-advised fund, indicates Americans still plan to give but possibly haven’t considered their intentions in light of tax reform realities.

Want to know more?

What’s the background?

When Congress passed the Tax Cuts and Jobs Act in December 2017, the only direct change to the charitable contribution deduction was to increase the limit on how much you could deduct. Before tax reform, those who itemized could generally deduct charitable contributions up to 50% of their adjusted gross income. Tax reform bumped that limit up to 60%.

However, tax reform also gave a whopping boost to the standard deduction — roughly doubling it for all filing statuses. That substantial increase means fewer taxpayers will have itemized deductions exceeding their standard deduction. Many who itemized their deductions on their 2017 tax returns probably won’t itemize for their 2018 returns (which they’ll file in 2019).

That means fewer taxpayers are likely to take the deduction for charitable contributions. But will they continue to donate anyway, even without the tax benefit?

What’s the latest?

Fidelity Charitable surveyed 3,000 Americans who both itemized their tax deductions and made charitable donations in 2017. The organization found that four in five said they planned to give the same amount or more in 2018 than they did in 2017. Further, 58% are still planning to itemize their deductions — which means they could take a deduction for their charitable giving.

However, the organization notes that givers may not be aware of the realities of tax reform.

According to the IRS, more than 45 million taxpayers itemized their deductions in 2016. The higher standard deduction brought about by tax reform is likely to reduce the percentage of filers who itemize from 26% down to just 8%, the White House’s Council of Economic Advisers predicts.

In fact, Fidelity Charitable points out in its report, 51% of households with incomes of less than $100,000 say they plan to itemize for 2018. But at that income level, many may add up their itemized deductions (including their charitable donations) only to discover the total doesn’t exceed the new standard deduction for their filing status.

Why does this matter?

Donations are the lifeblood of any charity. In 2017, American individuals, bequests, foundations and corporations donated more than $410 billion to charity, according to Giving USA.

The projected decline in the number of taxpayers who itemize their deductions could translate into a significant drop in donations, charitable organizations fear.

In fact, nearly 30% of charitable organizations predict their overall fundraising for 2018 will decrease, the Association for Healthcare Philanthropy reports.

What can you do?

Of course, plenty of people who have never itemized their tax deductions nor taken a deduction for charitable giving do donate to charity every year. If that’s you, the higher standard deduction probably won’t influence your decision to give one way or another.

If you were planning to itemize in 2018 and are waiting until the end of the year to make a donation, do a rough tally of your itemized deductions now. You may find the total won’t top the new higher standard deduction for your filing status. In that case, you’ll have a decision to make.

If you won’t be itemizing and still would like to donate to charity, it’s possible to find other ways to reduce your tax bill without itemizing your deductions:

  • Try maximizing “above-the-line” deductions that you’re allowed to take without itemizing, such as contributions to traditional individual retirement accounts or health savings accounts.
  • Look into any tax credits that might be available to you, since taking a tax credit doesn’t require you to itemize deductions.
  • Fidelity Charitable suggests “bunching” — bundling multiple years of donations into one year to help make sure your itemized deductions exceed the standard deduction.

At the end of the day, however, your decision to donate to charity may just come down to a commitment to do good, whether or not you get any tax benefit out of it.

The results of Fidelity Charitable’s survey “reaffirms what we already know about donor motivations for giving,” the organization notes in its report. “Giving back or making a difference are the primary drivers of charitable giving.”