The sweeping tax overhaul passed in 2017 could result in 2.6 million fewer households making charitable donations and $19.1 billion less donated each year through 2025, a study released by nonprofit advocate Independent Sector finds.
The new tax law allows only those who itemize returns to deduct their charitable gifts. It doubled the standard deduction, greatly reducing the number of taxpayers who itemize.
Independent Sector commissioned Indiana University Lilly Family School of Philanthropy, in partnership with the University of Pennsylvania’s Wharton School of Business, to examine several policy proposals under consideration by the nonprofit sector that could extend charitable giving incentives to non-itemizers.
The report focuses on five policy options that aim to offset the continued decline in donors, unequal treatment of taxpayers’ charitable gifts in the tax code and the potential decrease in charitable giving resulting from the tax law.
“This research also includes an analysis of how much individual policy proposals could cost the federal government in revenue, because we know it is a vital consideration for many advocates, and we hear about it regularly from policymakers,” Dan Cardinali, Independent Sector’s president and chief executive, wrote in a blog post.
“All five policy proposals could have an immense impact on American civil society, and their cost estimates must be considered with that ambition in mind.”
The researchers found that all five policies could bring in more donor households, and four could generate more charitable dollars than would be lost because of the tax changes:
- Deduction identical to itemizers’ tax incentive
- Deduction with a cap in which gifts over $4,000/$8,000 do not receive an incentive
- Deduction with a modified 1% floor, in which donors can deduct half the value of a gift below 1% of their income and the full amount if it is above 1%
- Nonrefundable 25% charitable giving tax credit
- Enhanced deduction that provides additional incentives for low- and middle-income taxpayers
According to the study, a nonrefundable 25% charitable giving tax credit to non-itemizers would have the biggest positive effect on both the amount donated ($37 billion) and the number of donor households (10.6 million) of the five policy options analyzed, but would cost the U.S. Treasury $33 billion in lost revenue.
Extending the charitable deduction to non-itemizers could generate up to $26 billion in additional donations and induce up to 7.3 million additional households to donate in 2021, the study found. This would reduce Treasury revenue by up to $22 billion.
Researchers estimated that the non-itemizer deduction with a modified 1% floor would also have the largest net effect on charitable giving dollars compared with the cost to the Treasury, bringing in up to $7 billion more than would be lost in Treasury revenue. But it would also bring in the fewest donor households.
The non-itemizer deduction with a $4,000/$8,000 cap has the largest potential effect on donors per dollar cost to the Treasury, according to the study. This policy would bring in up to 352 new donor households per $1 million lost in Treasury revenue. It is the only proposal that would generate fewer additional charitable dollars than would be lost as a result of tax overhaul.
— Check out Charitable Gifts From IRAs Shot Up by 74% in 2018 on ThinkAdvisor.