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George F. Bearup, J.D. Senior Legal Trust Advisor

25-Nov-19

Tax Act’s Impact on Charitable Giving

Take-Away: Preliminary data culled from tax returns suggest that the 2017 Tax Act has had a negative impact on charitable giving, as many predicted.

Background: The 2017 Tax Act radically changed many income tax provisions that affect charitable giving. Some of these important changes (i) doubled the size of the standard income tax deduction for individuals and married couples who file jointly; (ii) limited the income tax deduction for state and local taxes (SALT) to $10,000 a year; (iii) while other changes curtailed or eliminated other income tax deductions. The result was that for most Americans, the income tax deduction associated with their charitable gifts was pretty much eliminated. In short, for most Americans, their charitable giving will be with after-tax dollars. There was speculation in early 2018 that if there was no income tax benefit derived from charitable gifts-other than for the super-wealthy- charitable giving as a nation would drop, with obvious negative consequences to the tax-exempt entities that depend upon the philanthropy for their existence. We now have preliminary information that confirms the earlier speculation with regard to the drop in philanthropy if the income tax benefits of charitable giving disappeared.

Source: “Filing Season Statistics, Mid-July Filing Statistics by AGI,” 2019, www.irs.gov/statistics

Preliminary Data Conclusions: Each year the IRS provides what it calls a rolling disclosure of filed tax returns. The IRS publishes periodic data that summarizes the number of tax returns that have been filed by a particular date. These reports also include details with regard to the amount of income and deductions reported by the adjusted gross income (AGI) range. The IRS released this data in July that reflects the content of filed income tax returns for the 2018 income tax year- those that had been filed by July 25, 2019. About 92% of the income tax returns had been filed by that July 2019 date. The 2018 filings were compared to the number of filings in 2017. Accordingly, about 92% of the 2018 income tax return data was available in the IRS’ July report. Probably those taxpayers with more reportable income, and thus the need to itemize their income tax deductions, is part of the 8% that is not yet available to study, so that the information made available by the IRS on the 92% of returns that were filed is still incomplete, and thus may skew the conclusions. Nonetheless, some trends are apparent from the data.

  • Number of Itemizers Down: The number of taxpayers who itemize their income tax deductions dropped from 30% to 10%. Only those taxpayers with AGI levels that exceed $500,000 a year continued to itemize their charitable gifts.
  • Number Who Claimed Charitable Deductions Down: The number of taxpayers who claimed charitable income tax deductions dropped from 24% to 9%. In 2017, a majority of taxpayers with income of $100,000 a year or more were able to deduct their charitable gifts; that 2017 percentage increased to above 90% if their annual AGI exceeded $200,000, for comparison purposes.
  • Amount Claimed as Charitable Deduction Down: The amount of charitable gifts that were itemized dropped from $160 billion in 2017 to $102 billion in 2018, or a decline of 36%.
  • Amount of Charitable Gift Increases: Perhaps to balance against the drop in the total amount of charitable gifts made in 2018 is the increase in the amount of the average charitable gift reported by a taxpayer. This early IRS report suggests that the amount of the average charitable gift made more than likely made by wealthy individuals, increased. Some suggested reasons for the increase in the average charitable gift include:
    • (i) these taxpayers who gave to charity and itemized were able to do so because of their relatively higher levels of donative intent, i.e. they can afford to give more than average taxpayer,  induced in part by lower marginal personal income tax rates created by the 2017 Tax Act; and
    • (ii) these taxpayers may have embraced the conventional wisdom that followed shortly after the 2017 Tax Act, to bunch their charitable giving into a single tax year in order to be able to deduct their charitable gifts. An example of this bunching strategy is that substantially more gifts (billions) were made to donor-advised funds (DAF) in 2018 when compared to 2017.

Caveat: As noted earlier, by the time this data was released by the IRS in July, about 8% of the 1040 income tax returns for 2018 had not yet been filed. As such, it is possible the data gleaned from that final 8% cohort may alter, to some degree, the preliminary trends culled from the 92% of the 2018 1040 income tax returns that were filed that show a drop in philanthropy.

Conclusion: If there is a message buried in this data, it is that the primary source of philanthropy was, and will continue to be even more so, from very wealthy Americans. The message given by a charity to a prospective donor that ‘your contribution will be tax-deductible’ will only resonate with the 12 million households in a country with 250 million adults who continue to itemize their income tax returns. Charitable giving is, and it will continue to be, the primary concern of high-income taxpayers (and those who advise them.) This change in philanthropy, if it is truly a trend, will cause more charities to devote time and resources to the very wealthy and less to rank-and-file taxpayers who will not be able to deduct their charitable gift (due to the much larger standard deduction amount.) The unanswered question is whether this change in the income deductibility of charitable giving due to the increase in standard deduction amount will threaten the existence of many small community-supported charities. Hopefully, the increase in the amount of the average charitable gift (primarily by wealthier taxpayers) will offset the drop in the number of charitable gifts the charity can expect to receive. This is just one more example of the unintended consequences of ‘tax reform.’