Potential Impact of Tax Reform
on Charitable Giving

Introduction

On December 22, 2017, President Donald Trump signed the Tax Cuts and Jobs Act (Public Law No: 115-97; previously H.R. 1) into law, significantly changing federal tax policy. The changes have raised questions from fundraisers, donors, and scholars about the potential effects of the new tax law on charitable giving.

Changes to charitable giving are expected: previous research has shown that taxpayers adjust how much they donate to qualified charities in a given year based in part on whether their donations are tax deductible and how this deduction affects their tax liability. However, scholars do not agree on exactly how responsive taxpayers are to changes in tax policy. Additionally, while studies have been conducted on the combined effects of certain elements of proposed changes, research is limited on the impact of all the changes in the final legislation happening simultaneously.

Although the effects of the tax law on charitable giving cannot be determined with certainty at this time, we address the findings and implications of studies that have analyzed specific aspects of the policy changes.

Individual Giving

Two changes in particular have been common among most proposed tax reform plans over the past decade: a decrease in the top marginal tax rate and an increase in the standard deduction for individuals and couples. In this section, we address the separate and combined effects of a decrease in the top marginal tax rate and an increase in the standard deduction for individuals and couples.

Figure 1
:
Current policy1 (2017) versus the Tax Cuts and Jobs Act (2018)
Current Law Tax Cuts and Jobs Acta
Standard Deduction Single $6,350 $12,000
Joint $12,700 $24,000
Tax Brackets Single 10% $0–$9,325 10% $0–$18,650
Married Filing Jointly $0–$18,650 $0–$19,050
Single 15% $9,325–$37,950 15% $9,525–$38,700
Married Filing Jointly $18,650–$75,900 $19,050–$77,400
Single 25% $37,950–$91,900 25% $38,700–$82,500
Married Filing Jointly $75,900–$153,100 $77,400–$165,000
Single 28% $91,900–$191,650 28% $82,500–$157,500
Married Filing Jointly $153,100–$233,350 $165,000–$315,000
Single 33% $191,650–$416,700 33% $157,500–$200,000
Married Filing Jointly $233,350–$416,700 $315,000–$400,000
Single 35% $416,700–$418,400 35% $200,000–$500,000
Married Filing Jointly $416,700–$470,700 $400,000–$600,000
Single 39.6% $418,400+ 39.6% $500,000+
Married Filing Jointly $470,700+ $600,000+
Charitable Deduction Itemizers Only Itemizers Only
Percentage of Taxpayers

Who Itemize
30%b 5–12.5%c
a 2018 tax year b 2014, actual c 2018, estimated
Sources:

  • “Distributional Analysis of the Conference Agreement for the Tax Cuts and Jobs Act,” Tax Policy Center, December 18, 2017, www.taxpolicycenter.org
  • Kathryn Vasel, “Why charitable giving could slow under proposed tax changes,” CNN Money, November 16, 2017, money.cnn.com
  • “Preliminary Details and Analysis of the Tax Cuts and Jobs Act,” Tax Foundation, December 18, 2017, taxfoundation.org

Increasing the Standard Deduction

The Tax Cuts and Jobs Act will increase the standard deduction to $12,000 for single filers and $24,000 for joint filers. Recent research by the Indiana University Lilly Family School of Philanthropy, commissioned by Independent Sector and published in the Tax Policy and Charitable Giving Results report, examined the effects of increasing the standard deduction to $11,000 for single filers and $22,000 for joint filers. Increasing the standard deduction to these amounts alone could decrease charitable giving between $4.0 billion (1.4%) and $11.0 billion (3.9%).3

In general, research finds that while tax incentives are not the primary motivation for giving among most donors, the charitable deduction incentivizes giving and affects the timing and amount of donations. The charitable deduction has typically only been available to taxpayers who itemize,4 and itemizers are far more likely to donate to charity than non-itemizers. Itemizers also donate larger amounts, accounting for approximately 80% of total charitable giving reported in the Giving USA 2017: The Annual Report on Philanthropy for the Year 2016.5

There are some limitations to these research findings. For instance, studies on this topic assume that the new group of non-itemizers resulting from the near doubling of the standard deduction will immediately conform to the giving patterns of households that did not itemize before passage of the tax law. Some experts have stated that there is no way of knowing the ways in which giving habits will change for households that previously itemized but will no longer do so.6

Decreasing the Top Marginal Tax Rate

The Tax Cuts and Jobs Act also reduces the top marginal tax rate for individuals and couples from 39.6% to 37%. The Tax Policy and Charitable Giving Results report found that decreasing the top marginal tax rate to 35% could decrease charitable giving between $0.9 billion (0.3%) and $2.1 billion (0.8%).7

Combined Effects of Increasing the Standard Deduction
and Decreasing the Top Marginal Tax Rate

To gain a full picture of the impact of tax reform on charitable giving, it is important to understand the combined effects of policy changes in addition to the separate effects. The Tax Policy and Charitable Giving Results report examined the combined effects of increasing the standard deduction to $11,000 for single filers and $22,000 for joint filers and decreasing the top marginal tax rate to 35%. Together, these proposals could decrease charitable giving by between $4.9 billion (1.7%) and $13.1 billion (4.6%).8

The Tax Policy Center also analyzed the provisions contained in the version of the Tax Cuts and Jobs Act that passed the House of Representatives on November 16, 2017, and found the proposal could reduce charitable giving by between $12 billion (4%) and $20 billion (6.5%) in 2018.9 The Council on Foundations estimated that the Tax Cuts and Jobs Act could decrease charitable giving between $16 billion and $24 billion.10

Research is limited on the effects of all the changes contained in the final version of the law occurring simultaneously. In addition, studies analyzing tax policy typically do not address the dynamic effects of economic growth and market conditions. It is possible that the tax law may stimulate economic growth and market conditions that could benefit charitable giving. It is still unknown what the larger-scale economic effects of the tax law will be, and how these changes may impact or offset losses in charitable giving from other policies.11

Capping the State and Local Tax Deduction

Under the Tax Cuts and Jobs Act, taxpayers who itemize will only be able to deduct their state individual income, sales, and property taxes up to a $10,000 threshold. Previously, the deduction amount was unlimited, but filers had to decide whether to deduct their individual income taxes or sales taxes; property taxes were completely deductible.12 For many filers, the state and local tax (SALT) deduction is a key reason for itemizing, with more than 95% of itemizers claiming the deduction in 2014.13

The SALT deduction has primarily benefitted individuals/households from high-income, high-tax states, with filers from California, New York, New Jersey, Texas, and Pennsylvania claiming more than half the value of the deduction.14 As such, officials in high-tax states were considering workarounds to changes in the SALT deduction at the start of 2018. For example, since the tax code counts gifts to state governments and their subdivisions as charitable contributions, a bill was proposed in the California State Senate that would allow taxpayers who donate to a “California Excellence Fund” to receive a credit against their state income tax for the amount they contribute. Officials in New Jersey put forth a similar strategy for local property taxes.15

As with many of the provisions in the Tax Cuts and Jobs Act, it remains to be seen how changes in the SALT deduction and proposed workarounds will impact giving behavior. Together with the near doubling of the standard deduction for individuals and couples, the tax law’s cap on the SALT deduction supports predictions that moving forward, fewer filers will itemize, thus becoming ineligible for the charitable deduction. Additionally, passage of the proposed bills incentivizing contributions to state and local governments in California and New Jersey could affect to whom taxpayers in these states give.

Expected Behavioral Responses

The 1980s saw significant changes in federal tax policy.16 These changes created an opportunity to examine how people’s behavior adjusts in response to changes in tax policy. Not only did these changes include major adjustments to marginal tax rates and the standard deduction for individuals and couples, but for a short time, the charitable deduction was available to non-itemizers.17 Similar to the current environment, the Tax Reform Act of 1986 in particular led to a great deal of fear among nonprofits about detrimental effects on charitable giving.

Scholars have noted that economic models that aim to predict the effects of policy changes cannot account for all the factors that influence taxpayer behavior.18 While researchers are aware of this, journalists, policymakers, and lobbyists tend to focus on the topline findings, ignoring caveats of the research. Although this can be necessary to make the research understandable to the general public, it can also lead to unsupported certainty. For example, the Tax Policy and Charitable Giving Results report focused on increasing the standard deduction and decreasing the top marginal tax rate for individuals and couples.19 While this allows us to understand the hypothetical effects of specific proposed changes, it is not meant to predict real-life giving patterns.

People do state that the tax benefits they receive motivate their giving.20 However, factors such as personality, religious affiliation, warm-glow, and other external benefits have an even greater effect on donor behavior.21 Economic models from research conducted in the 1980s also performed reasonably well in predicting the effects of the changes in tax policy.22 Together, these studies suggest that policymakers and nonprofit leaders should take into account the results of economic models, but should not discount other influences on real-life charitable behavior.

Other considerations also factor into the impact of tax reform on charitable giving. Many philanthropic scholars and observers are predicting that donors will have front-loaded their giving by moving some of their planned 2018 donations to the end of 2017 to receive a greater tax benefit.23 While there is some evidence that this happened before the reduction in tax benefits for charitable gifts between 1986 and 1987,24 it is difficult to distinguish this trend from other more temporary changes,25 including changes in income26 that also affected charitable giving.

Year-End Giving

Although the full extent of year-end giving by individuals/households in 2017 has not yet been assessed, nonprofits across the nation encouraged donors to give prior to implementation of the new tax law—particularly the near doubling of the standard deduction that went into effect on January 1, 2018.

Independent Sector suggested on its website that charities notify donors of the changes and implore donors to take advantage of the charitable deduction while they still could.27 Some organizations have reported a notable surge in charitable giving at the end of 2017. For example, the Greater Cedar Rapids Community Foundation in Cedar Rapids, Iowa, saw double the amount of donations in December 2017 than it witnessed in December 2016. The Greater Chicago Food Depository also reported receiving donations from supporters who were originally planning to make contributions in 2018.28

Additionally, nonprofits including the Community Foundation of Greater Atlanta encouraged donors to give to or start donor-advised funds (charitable accounts that allow donors to take a tax deduction up front, but distribute investments in future years).29 Indeed, three major providers of donor-advised funds—Charles Schwab, Fidelity Charitable, and Vanguard—saw a substantial rise in new accounts, contributions, and grants to charitable organizations during the second half of 2017.30 The Combined Jewish Philanthropies of Greater Boston also reported a significant increase in the creation of donor-advised funds, with approximately 25 new funds in the months leading up to the close of 2017.31

Implications: Although there are some limitations to the findings, most research concludes that nearly doubling the standard deduction for individuals and couples may substantially reduce household giving. While most research has examined a larger change in the top marginal tax rate, the decrease in the marginal tax rate for individuals and couples under the Tax Cuts and Jobs Act will likely still lead to a slight decline in charitable giving.

The complex, dynamic effects of the Tax Cuts and Jobs Act remain to be seen in the long term. Nevertheless, recent research examining the combination of multiple policy changes indicates that the tax law will likely result in a decrease in charitable giving by individuals/households in the short term. More specifically, should the predicted surge in 2017 year-end giving materialize, this artificial bump would likely be followed by a significant decline in individual giving in 2018.

Some observers also expect the new tax law may lead donors to adopt a “bunching” strategy in which donors double their charitable contributions and itemize their gifts every two or three years, while taking the standard deduction the other years.32 Using this approach, the amount that donors contribute over the long term may not change, but rather when donors make their gifts on a year-to-year basis.

Bequest Giving

Prior to the passage of the Tax Cuts and Jobs Act, the exemption for estate, gift, and generation-skipping taxes was set at $5 million for individuals and $10 million for couples in 2011, and was indexed for inflation in subsequent years.

The Tax Cuts and Jobs Act doubled these rates. With inflation considered, the exemption amount for individuals is $11.2 million, and $22.4 million for couples in 2018.

Estates react slower to policy changes than other sources of giving, in part because wills may be written well in advance of the passing of the deceased and not modified to reflect policy changes; it can take years for estates to be fully processed and for bequests to be fulfilled; and the general unpredictability of bequest giving, given that people do not plan when they will pass away.

Despite this slower response to policy changes, studies have observed some effects of the estate tax on charitable giving overall. One study found that wealthy taxpayers considered the estate tax an important factor in deciding amounts to give to charity in their wills.33 Other research has found that donors may be motivated to give more during their lifetime if they know their estates will be subject to the estate tax.34 Another recent study found that the repeal of the estate tax may decrease lifetime contributions by up to 12%.35

Most studies about the estate tax and its impact on charitable giving have focused on repeal of the estate tax, rather than on raising the exemption level as the Tax Cuts and Jobs Act did. We found just one study that indicated a statistically significant link between increasing the exemption level for the estate tax and a decrease in bequest giving.36

Research on the effects of abolishing the estate tax on charitable giving presents varying numbers. The Tax Policy Center estimates that removing the estate tax in 2014 would have caused charitable bequests to decline by $4 billion that year.37 Another study estimated that repeal of the estate tax would mean a 37% decrease in charitable bequests. Research by the Congressional Budget Office replicating the method employed in this study using a different measure of wealth found that charitable bequests would be reduced by 20%.38 Yet another study concluded that repeal of the estate tax would decrease charitable bequests by 12%.39

Implications

While estate giving tends to be less responsive to policy changes than other giving sources in the short term, some research suggests that fewer estates being subject to the estate tax could lower lifetime giving as well as decrease charitable bequests in the coming years.

Corporate Giving

In addition to reforms affecting individuals/households and estates, the Tax Cuts and Jobs Act also contained changes to the corporate tax code that have implications for charitable giving.

However, recent research, as well as the actions of corporations in the aftermath of the law’s passage, present varying analyses of the potential impact of these reforms on corporate donations in the coming years.

Historically, giving by corporations and their foundations has been largely dependent on the overall health of the economy. Corporate pre-tax profits are a particularly significant factor in how much corporations donate annually. Since 2004, giving as a percentage of corporate pre-tax profits has remained at 0.8% or 0.9% (with the exception of 0.7% in 2013), holding steady despite changes in the economic and political environment during this time.40

Some observers have suggested that the reduction in the top corporate tax rate from 35% to 21% would decrease incentives for corporate giving; one scholar estimates a resulting $1.3 billion reduction in corporate donations—a 7% decrease from the $18.6 billion businesses gave to charity in 2016.41

Other scholars have suggested that corporations may spend more in their communities as a result of the increased profits they are likely to see due to tax reform.42 Indeed, Boeing announced immediate commitments of an additional $300 million in investments to support employees and communities as a result of the new tax law, including $100 million for corporate giving.43 Wells Fargo stated that it will expand its philanthropy to $400 million in 2018 (up from $281 million in 2016) and commit 2% of its after-tax profits to corporate philanthropy in 2019.44

Furthermore, a study by Accounting Professionals revealed that, while many companies planned to provide year-end bonuses to workers in 2017 in anticipation of the tax law, some companies intended to give additional money to charity instead. The study found that, although nearly one-third of companies planned to give year-end bonuses, 38% of those not giving bonuses said they would donate to charity in lieu of employee bonuses—a substantial increase from 7% in 2016 and 5% in 2015.45

Implications

While recent research in limited, studies on the impact of lowering the top corporate tax rate, as well as the actions of corporations in the wake of the new tax law, offer mixed predictions for corporate giving. Some observers expect that reducing corporate tax liability will de-incentivize giving; others foresee companies investing their tax savings into their employees and the community. Given the historical link between corporate giving and corporate pre-tax profits, it is also likely that economic factors will be more important drivers of growth in corporate philanthropy than policy changes in 2018 and 2019.

Foundation Giving

Under the Tax Cuts and Jobs Act, tax-exempt organizations, including foundations, are required to calculate each trade or business activity separately (rather than in the aggregate as permitted under previous law) for the unrelated business income tax (UBIT).

Additionally, certain employee fringe benefits, such as transportation and on-site gyms, are characterized as taxable unrelated business income under the tax law. The Council on Foundations reported that this requirement complicates the administration of legitimate unrelated business activities. Research is currently pending on the implications of subjecting the value of certain fringe benefits to the UBIT.46

Foundations and other tax-exempt organizations are also now subject to an excise tax equivalent to the top corporate rate on compensation over $1 million paid to any of their five highest-paid employees. This provision primarily impacts the largest organizations, but could affect how tax-exempt entities such as foundations report compensation and benefits, according to the Council on Foundations.47

Despite these changes, some observers have noted that the new tax law could stimulate foundation giving due to its potential to facilitate the growth of stock portfolios and corporate income. Indeed, foundation endowments performed well in 2017, with the Dow Jones Industrial Average up more than 30%. If tax reform leads to continued asset growth for foundations, payout requirements could result in increased grantmaking in the future.48

Implications

Since foundations are the recipient of charitable gifts from individuals/households, corporations, and estates, the separate and combined effects of the tax law on donations from these sources could impact giving by foundations. Furthermore, the overall health of the economy could affect how foundations’ focus their grantmaking in the coming years. For example, research shows that, although funding priorities tend not to shift significantly during recessions, funders have shown a willingness to respond to increased need and adapt their grantmaking in changing circumstances.49

Conclusion

While many experts expect the Tax Cuts and Jobs Act of 2017 to decrease charitable giving, tax policy is only one factor that impacts the growth or decline of charitable giving.

Research shows that charitable giving is closely related to changes in economic factors such as gross domestic product (GDP), the Standard & Poor’s 500 Index (S&P 500), and consumer expenditures. Due to the complex interactions among policy and economic factors, it is difficult to categorize donor behavior such as year-end giving as pre-giving due to passage of the tax legislation or as being driven by economic growth.

Although tax reform may be top-of-mind for many fundraisers, it is important to acknowledge that the U.S. economy is currently very strong. The “Stability of the Variables Used in the Forecast” subsection in the “Conditions That May Affect the Outlook for Giving” section of this report offers a detailed examination of the impact that the changes in economic factors may have on the baseline projections contained in this report.

The Philanthropy Outlook’s baseline projections were created using an econometric model that incorporates economic variables but does not address policy changes. The conditions for charitable giving created by the tax law and how donors will react to these conditions are still unknown, but merit careful attention in the coming years.