Taxpayers living in high-tax states whose deductions are limited to $10,000 for state and local taxes are not the only ones that won’t benefit much if at all from the new tax law. Charities will also suffer.
According to the American Enterprise Institute, a conservative Washington think tank, charities will collect $16.3 billion to $17.2 billion less in donations this year as a result of the new law.
(Related: Highlighting Tax Law Changes in One Page)
An estimated 27.3 million more taxpayers are expected to take the standard deduction, which was doubled in the new tax bill, instead of itemizing, according to a new AEI report written by research fellow Alex Brill and research assistant Derrick Choe. Without the ability to deduct those donations, they will become more expensive.
In addition, taxpayers will have less incentive to itemize because their marginal tax rates are lower.
AEI estimates that 83% of the $17.2 billion expected decline in charitable donations — on a static basis, equal to a 4% decline in giving — is due to the doubling of the standard deduction; the remaining 17% is due primarily to the lower marginal tax rates for high-income taxpayers. (The $16.3 billion decline in contributions, at the lower end of AEI’s expectations, is a result of a dynamic analysis that assumes slightly stronger economic growth due to the new tax law.)
The new tax law nearly doubles the standard deduction for married couples filing jointly from $12,700 to $24,000 with an additional $2,600 for couples 65 or older (that was previously $12,700) and eliminates personal exemptions.
The law also lowers the top marginal tax rate from 39.6% to 37% and raises the adjusted gross income subject to the top tax rate from $480,050 to $600,000 for married couples filing jointly.
Taxpayers in the top 37% tax bracket will essentially pay 63 cents to donate $1 where they previously paid 60.4 cents, and there will be fewer of them. Taxpayers who don’t itemize will pay $1 for each $1 donated.
“Many taxpayers who otherwise would have deducted their charitable donations as itemizers will now claim the standard deduction and not receive a tax incentive for charitable giving,” according to the AEI authors. The Joint Committee on Taxation has reported that the percentage of itemizers is expected to fall from 31% to 13% of U.S. taxpayers.
“For nearly all the 19.9 million tax filers who will continue to itemize their deductions, the price of charitable giving will increase slightly because their marginal tax rate will decline,” the AEI report notes.
Only those donors who give a very large portion of their income to charity will see the cost of their donations decline because the tax law raised the ceiling on cash donations from 50% of AGI previously to 60%.
The AEI recommends several policy options to restore the charitable donations lost as a result of the new tax bill:
- An above-the-line deduction for charitable donations that would be available to taxpayers who don’t itemize. It mentions two bills proposed in Congress: The Universal Charitable Giving Act, introduced by Rep. Mark Walker (R-N.C.) and Senator James Lankford (R-Okla.), which limits the deduction to one-third of the standard deduction, and the Charitable Giving Tax Deduction Act, introduced by Rep. Chris Smith (R-N.J.), which has no limit on the deduction.
- A 25% nonrefundable tax credit, available for anyone who pays individual income taxes. Compared to the above-the line deduction, this tax credit lowers the cost of charitable donations for those in tax brackets below 25% but raises it for those in tax brackets above 25%.
All variations of these options would increase charitable giving and more than offset the reduction expected as a result of the new tax law, but the above-the line deduction with a floor of a $500 donation for single taxpayers and $1,000 for married couples would most closely match the level and distribution of giving before the new tax law took effect, according to the AEI report.
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