Tax Reform and Charitable Giving

October 03, 2024

When the tax system was reformed in 2017 in the Tax Cuts and Jobs Act, there was much concern about the effect the changes would have on charitable giving. First, the rough doubling of the standard deduction meant that far fewer taxpayers would be itemizing, and without itemizing there is no tax benefit at all for the charitable gift. Second, the top marginal tax rate was reduced slightly, which meant that the net tax benefit for the wealthiest taxpayers would go down.

History seems to show that the importance of tax incentives for charitable giving may have been overstated, because giving went up, not down, after the 2017 tax changes went into effect, according to figures compiled by Giving USA.

For reasons related to the legislative rules concerning the federal budget, the personal income tax provisions from 2017 are slated to expire at the end of 2025. Now some observers are concerned that the expiration of those rules will have an adverse effect on charitable giving. Jack Salmon, a director of Policy Research at Philanthropy Roundtable, wrote in The Chronicle of Philanthropy that “A total of 23 tax provisions are set to expire at the end of 2025, many of which helped fuel charitable giving trends in recent years.” He refers to studies that show a one point increase in marginal tax rates leads to a 0.8% decline in gross domestic product, which in turn will harm philanthropy. “A thriving economy translates to increased economic activity and disposable income, which fuels charitable generosity.”

According to Mr. Salmon, there are several changes to the tax rules under discussion that could have very negative effects for philanthropy.

Wealth taxes. Bernie Sander’s wealth tax proposal would treat the assets of private foundations as if they were the personal wealth of the founder. If such a change worked as intended, the importance of private foundations for philanthropy would be greatly reduced.

Donor advised funds. There has been some concern expressed about the fact that an immediate tax deduction is permitted for giving to a donor-advised fund, even though a charity won’t be receiving any funding until an unknown future date. Mr. Salmon counters that there a legitimate uses for donor-advised funds, including “simplifying administrative processes and bookkeeping, pooling resources with other donors, and protecting donor information.” Placing new restriction on these funds could stifle innovative grantmaking, as well as reducing the flow of money to charity.

Charitable deduction cap. In the quest to get more tax revenue from billionaires, some have recommended a $500 million lifetime cap on the charitable deduction. Would that have an effect on philanthropy? Mr. Salmon points out that in 2023 alone the top 50 philanthropic billionaires gave nearly $12 billion to charity. They didn’t do it just for the tax deduction, but without the deduction they likely would have given less.

Mr. Salmon concludes: “The tax code is a complex web, and its effect on philanthropy is multifaceted. As policymakers navigate potential changes to the tax code, they need to consider the unintended consequences on charitable giving.”

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