To say that the Congressional tax bill details have been a moving target would be an understatement. If you’re like me, you’ve given up trying to understand the specific effect on your taxes until the dust settles. But, also like me, maybe you’re curious about proactive things you can do to lessen your tax burden this year and next.
I thought I’d try to summarize the effect of the bill on charitable giving, and by virtue of that, your charitable deduction.
The foremost issue for charities is deductions, and more specifically, who itemizes. With the standard deduction essentially doubling (to $12,000 for single filers and $24,000 for couples), more taxpayers will take the standard deduction as opposed to itemizing.
And it’s not just because the standard deduction will increase. There are also impending limits as to how much people will be able to deduct so that those who were deducting will deduct less; meaning many more people who will be able to benefit from the charitable deduction this year won’t next year. This situation is aggravated in states with high taxes and real estate prices (like California). As a result of all this, it is estimated that the number of people who itemize might drop by more than half next year.
That drop is relevant because if you don’t itemize, you cannot deduct a gift. As a result, the cost of a gift goes up. You can use this gift cost calculator to see what your gift costs you at your marginal tax rate and then compare that to the cost without deduction (or at full gift value). Which begs the question: Will charitable giving decrease?
There have been some interesting studies through American tax history about how changes to the tax code impact charitable giving overall. One study by Giving USA looked at the Tax Reform Act of 1986, in which the goal was to simplify the tax code by adjusting tax brackets down and reducing the number of brackets. The charitable and home mortgage deductions were unaffected, but the top marginal tax rate was reduced from 50% to 28%. As expected, there was a huge rush to accelerate tax gifts in the final months of 1986, where a deduction was much more valuable. In fact, charitable giving increased by almost 17% in 1986 over the year prior. And in 1987, when the top marginal tax rate dropped to just 28%, total giving decreased from the year previous for the first time since Giving USA began reporting this information in 1955.
The decrease was only a few percentage points, but surely some charities were more affected than others. There are studies that show as the incentives for giving are increasingly favoring the wealthy, certain charitable sectors will gain over others. Unfortunately for the Academy (and humanity), environmental causes are not one of the sectors expected to grow with these changes. (Feel free to read more in this comprehensive study here).
As a donor, there are things you can do to plan ahead. Increasing your gift this year might be to your benefit; if your tax rate might fall, or you are someone who thinks that you’ll likely switch from itemizing to the standard deduction, gifts this year will cost much less than next. For this reason, some are making their 2018 gifts in 2017.
There might also be some benefit to accelerating property tax payments and thinking about capital gains and losses, but that is a deeper conversation dependent on your particular circumstances. We’re happy to answer additional questions or refer you to a CPA or the like if you are in need of financial or tax advice.