Can middle-class donors make up the giving gap?
A woman puts money into a Salvation Army red kettle outside the Giant Supermarket in Alexandria, Virginia, on November 22, 2023.
Eric Lee | Washington Post | Getty Images
A version of this article originally appeared in CNBC’s Inside Wealth newsletter with Robert Frank, a weekly guide to high-net-worth investors and consumers. become a member to receive future editions straight to your inbox.
Economists and academic experts say new tax laws risk reducing philanthropic giving by the wealthy next year, leaving less wealthy Americans with the difference.
Under President Donald Trump’s “big, beautiful bill” signed into law in July, several tax benefits for wealthy donors will be reduced. The effective tax advantage for top earners will also drop from 37% to 35%. Indiana University Lilly Family School of Philanthropy predictions This cap alone would reduce donations by $4.1 billion, to about $6.1 billion annually.
In addition, the bill limits tax incentives on items that can only deduct donations exceeding 0.5% of their adjusted gross income.
The bill also creates new incentives for middle- and low-income applicants to donate. Starting next year, about 140 million taxpayers who don’t file their details will be able to deduct up to $1,000 in cash donations per person who files. About 90 percent of taxpayers have taken the standard deduction since it was first introduced in 2017 during the Trump administration.
While the tax changes could help broaden the donor base, making it less reliant on the ultra-rich, experts are skeptical the math will balance out.
Elena Patel, co-director of the Urban-Brookings Tax Policy Center, told Inside Wealth she’s not optimistic that middle- and lower-income donors will be able to make up the shortfall because top earners are giving less.
“The nonprofit sector says every dollar counts, and so encouraging small donations from each household can have a meaningful impact for certain types of organizations. But the reality is that these types of contributions are not the bulk of charitable donations in the charitable sector,” he said. “This is a 2 percentage point decrease [for top earners] “It may not seem like a big deal, but you should keep in mind the size of the gifts given to the highest net worth individuals in the United States.”
What does the ‘K-shaped’ economy mean for philanthropy?
American households’ charitable giving continues to grow, reaching $392.45 billion last year, according to the latest data. report by Lilly School of Philanthropy for Giving USA. This is up 52% since 2014.
But while donations are increasing, fewer Americans are giving as wealthy donors increase their share of philanthropy, according to the university’s research.
Amir Pasic, dean of the Lilly School of Philanthropy, said encouraging Americans at all income levels to donate is valuable in itself.
“We’ve had the general problem of dollars increasing but the number of donors decreasing. This is a positive development because this can really increase the number of donors,” he said.
But financial stress limits the ability of everyday donors to donate, while wealthy ones donate more, Pasic said. The share of Americans who donate fell from 66.2% to 45.8% between 2000 and 2020, according to the university’s research.
“Economic uncertainty is always a concern for people to plan,” Pasic said. he said.
This lopsided or “K-shaped” economy shows signs of getting worse due to tariff increases and inflation. While low- and middle-income consumers are spending less on everything from McDonald’s burgers to flights, wealthier Americans are increasing their spending power.
Will the new cut move the needle?
Economist Daniel Hungerman said he questions whether the new cut will encourage significant numbers of donations or reward taxpayers who would mainly donate anyway.
While the new deduction is larger at $1,000 for single filers and $2,000 for married joint filers, a similar legislative effort in the ’80s failed to move the needle on charitable donations., he said. In 2020, the $300 temporary cut spurred by the Covid pandemic increased donations to charities by just 5%. Tax Foundation.
Trump’s tax bill It also permanently increased the standard deduction, which significantly reduced charitable giving, Hungerman said. His to work The higher deduction is estimated to have led to a permanent annual decline of $16 billion after the 2017 reforms.
But raising the federal deduction cap for state and local taxes (better known as SALT) could provide some relief, he said. More taxpayers in high-cost states would benefit from detailed listing that encourages donations.
Hungerman said encouraging daily donors to get into the habit of giving now can lead them to give at higher levels later if they increase their wealth.
“Perhaps even more interesting to me is if we can get the message out that everyone should give this way and change the giving behavior of some of these people, the long game is,” he said. “Somewhere out there is the Bill Gates of tomorrow.”
What can donors do now?
Taxpayers who currently plan to take the standard deduction will have the benefit of waiting until 2026 to donate. However, creators and high-net-worth donors will get more bang for their buck. to give before the end of the year.
Robert Westley, senior vice president and regional wealth advisor at Northern Trust, said he advises clients to accelerate their giving by this year if they plan to donate within the next four years.
Applicants may deduct only up to 60% of their annual adjusted gross income for cash donations to public charities. This rate drops to 30% for contributions from long-term appreciated assets such as stocks or real estate.
But taxpayers can generally carry forward excess deductions for five years, he said. According to Westley, it’s still unclear how much they’ll get for their money, since the IRS hasn’t yet stated whether excess deductions will be subject to the new floor and cap on charitable deductions.
He said he now recommends giving to a donor-advised fund, or DAF, for donors who want to give more but aren’t sure how to do so. With DAF, donors receive an upfront cut but can wait to allocate those funds to specific charities. For donors who want to transfer assets that appreciate, it is much easier to donate shares of stock to a DAF rather than donating them directly to a nonprofit organization.
Considering this year’s stock increase, Westley said: Many of their clients want to donate appreciated stocks, especially in the technology space, to offset gains and rebalance their portfolios.
“Their equity capital has appreciated and some may now represent a higher percentage of the portfolio than the target asset allocation,” he said. “When you donate these risk assets to charity, you get a tax benefit, you don’t realize the gain, and when this is done, you reduce your risk asset allocation.”
Lawyers and tax planners are still waiting for guidance from the IRS on a number of issues arising from the changes. For example, it is not yet clear whether deductions will be capped for non-donor trusts that make charitable donations, according to Westley.
But high-net-worth donors still have many tools at their disposal, he said. Top earners age 73 and over can effectively reduce their taxable income dollar for dollar by giving required minimum distributions to charity from an IRA.
Westley said this tactic is popular among retirement-age clients and will become even more popular with the increased SALT limit. Filers can lower their income to qualify for the enhanced SALT deduction, up to a maximum of $40,000 for taxpayers with income of $500,000 or less.
“You don’t even deal with any of the detailed deduction rules,” he said. “There is no ceiling on the tax benefit, and there is no floor or hurdle to clear for the deduction.”
