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How Tax Reform Could Hurt Charitable Giving

Do Americans give primarily for tax benefits or because generosity blesses both the giver and the recipient?

It is almost axiomatic that any government policy, however well-intended, will be subject to the Law of Unintended Consequences. This maxim holds that any action, especially those mandated by government, will have effects that reach beyond its intended purpose. One of the unintended consequences of the new tax reform law may be a detrimental effect on charitable giving.

Like many Americans, I was not fully aware of the effects of tax reform until I did my taxes. One of the most visible changes for individual filers is the increase to the standard deduction. Under the new rules, the standard deduction was almost doubled, increasing from $6,350 to $12,000 for single taxpayers and from $12,700 to $24,000 for married couples filing jointly.

In practical terms, this means that I had a pile of receipts that I didn’t need since the standard deduction was worth more than my itemized deductions. In most respects, this is a great thing for taxpayers because it simplifies preparing for and filing your taxes. In most cases, filling out a tax return is going to be as simple as filling out your income and taking the standard deduction.

Nevertheless, it did leave me wondering about how the change would affect charitable giving. Many people give to charities to get the tax deduction. The logical question is if people don’t get a tax benefit from charitable giving when they take the standard deduction, will they continue to give to charity?

Giving to charity to save on your taxes was never really quite as good an idea as many people thought. This is because in the past charitable donations counted as a tax deduction rather than a tax credit. This means that donations only affected the amount you paid in taxes indirectly. A tax deduction reduces the amount of taxable income, which in turn reduces the amount of tax that is owed.

The benefit of a tax deduction depends on a taxpayer’s personal circumstances, but a $1,000 tax deduction for a filer in the old 24 percent tax bracket would reduce the taxes owed by $240. In contrast, a tax credit directly reduces the taxes owed on a dollar-for-dollar basis. If you qualify for a $1,000 tax credit, you would owe $1,000 less in taxes. Because charitable giving was a deduction rather than a credit, givers didn’t get a full refund on their giving at a tax time, but it did help.

The flip side to the argument is that millions of taxpayers were already taking the old, lower standard deduction and they still gave to charity. In the past, taxpayers who didn’t have large deductions such as mortgage interest might well have not had enough deductions to make itemizing practical. The impact of tax reform on charitable giving would most likely affect middle-income donors who had enough deductions to itemize under the old law but not enough under the new tax reform.

The effect of the change will depend on how Americans view charitable giving. Do they give primarily to reduce their taxable income or do they give because generosity blesses both the giver and the recipient?

Many Americans have religious motives for giving to charity. About 80 percent of Americans identify with some religion per Gallup. Of these, about 70 percent are Christian, Jews and Mormons account for about two percent each and just under one percent are Muslim. All four faiths encourage adherents to give charitably. In particular, the Bible teaches believers to tithe, to give 10 percent of their earnings to support churches and the needy. Americans who take religious commands seriously are likely to keep giving even if it doesn’t change their taxes.

Another unintended consequence of tax reform on charitable giving is that there might be a movement away from government-approved charities to more direct giving. Rather than giving to charities that provide them with a tax-deductible receipt, more people might give directly to those in need. For example, a few years ago a friend wanted to fund a scholarship for a needy black student. He set up the donation through a church in part to reap the benefits of the tax-deductible contribution. Under the new rules, he might do just as well to write a check directly to the recipient.

So far, the effects of tax reform on charitable giving appear to be small, but Americans are still learning about the new law. CBS News reported in June 2018 that total revenue to nonprofits fell 2.4 percent in the first three months compared to 2017 while the total number of donors fell by 6.3 percent.

“We know that the main reason why people give to charity is not the tax incentive,” Steve Taylor, United Way Worldwide senior vice president and counsel for public policy said at the time. “We also know that the tax incentive allows people to give a little bit more than they would have otherwise. What you have is tens of millions of people who will give a little bit less, and that adds up to tens of billions of fewer dollars given to charity.”

We won’t know for several years exactly how changes to the tax law affect charitable giving. When the tax returns are filed and examined this year, new data will be available on how donations in 2018 differed over previous years. However, differences in returns this year may cause taxpayers to make changes in their behavior going forward, but those changes won’t be evident immediately. It will be interesting to watch and I’m sure that it will make a great research topic for some economist.

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