Uncharitable Giving
From: www.investmentnews.com
Charitable giving is undergoing a shift in the wake of the 2017 tax law, and could see yet more changes in the coming months and years as a result of legislation working its way through Congress.
Aside from a few tweaks, the tax law, which provided the most sweeping reform to the U.S. tax code in a generation, didn’t address charitable giving directly. Yet, charitable giving by individuals is at its lowest level since the financial crisis, and financial advisers point to changes in the tax law as the reason.
Specifically, under the new law, fewer people get a financial benefit from itemizing deductions on their tax returns — meaning fewer people get a tax break from their donations to charity. According to estimates from the Tax Foundation, 14% of taxpayers will itemize deductions on their 2019 returns compared with 31% of taxpayers who did so before tax reform.
“Twenty percent of the country lost the ability to deduct charitable contributions,” said Jamie Hopkins, director of retirement research and vice president of private client services at the Carson Group.
The Urban-Brookings Tax Policy Center estimated 21 million taxpayers would stop taking the charitable deduction because of the new law. The law raised the after-tax costs of donating by 7%, according to the think tank.
There are several reasons for the falloff. For one, the law roughly doubled the standard deduction in 2019 to $12,200 for single taxpayers and $24,400 for married couples filing jointly and surviving spouses, making it more advantageous for many taxpayers to take the standard deduction instead of itemizing. It also lowered individual income tax rates, reducing the value of all tax deductions. And it doubled the estate-tax exemption, to $11.4 million for singles and $22.8 million for married couples in 2019, which could result in fewer tax-motivated donations from wealthy families.
The law also diluted or eliminated several popular tax deductions for individuals. The biggest change was the imposition of a $10,000 cap on deductions for state and local taxes, which used to be unlimited. Additionally, taxpayers can only deduct interest on up to $750,000 of mortgage debt on new homes (the limit used to be $1 million) and can only deduct interest on a home equity line of credit in more limited circumstances. The law also eliminated deductions for “miscellaneous” items like tax preparation and investment-adviser fees.
Consequently, overall giving among individuals — the largest source of charitable contributions — fell by 3.8% on an inflation-adjusted basis in 2018, to $292.1 billion, compared with the prior year, according to Giving USA. Excluding the years 2008 and 2009, when the country was in the throes of the Great Recession, annual charitable giving among individuals hadn’t declined that much since 1987.
By contrast, giving among other sources like foundations and corporations was up 4.7% and 2.9%, respectively, when adjusted for inflation.
“This is the new normal of where we probably are on the numbers,” Mr. Hopkins said about the reduced figures among individuals.
Though taxes aren’t the main reason people donate to charity, and other factors such as market volatility in the fourth quarter of 2018 likely contributed to the decline in charitable donations, taxes do affect individuals’ incentives to donate, said Una Osili, professor of economics and philanthropic studies at the Indiana University Lilly Family School of Philanthropy.
The decline is also notable considering the strength of the U.S. economy last year, which would have typically propped up donations, experts said.
