Charitable Deductions and New Tax Law

Happy Final Tax Filing Day everyone. How charitable do you feel right now?

My accountant filed for an extension for me, so I’ll let you know in mid-October how I’m feeling, thanks for asking.

Anyway, one of the potential big changes resulting from the 2017 Tax Reform is the treatment of household charitable contributions, starting in 2018. Quite possibly that changes how much we all give every year.

At tax filing time, taxpayers may list all their charitable contributions and receive a deduction from income for that contribution. If for example I give $1,000 to a charitable association like the Society For Redundancy Society, and I am in the 25 percent tax bracket, I could expect to receive a $250 reduction in my taxes at tax filing time. A few other categories of things, like mortgage interest, get similarly rewarded via reduced taxes. It has often made sense to go to the hassle of listing these tax deductions, as long as they are larger than my household’s standard deduction, previously set at $12,700.

I can still do that, but the new tax policy passed in 2017 changes my incentive for itemizing deductions.

tax_policy_centerFewer of us will itemize deductions because the standard deduction – which allows people to skip itemizing – nearly doubled in 2018, up to $12,000 for individuals and $24,000 for couples. I’d have to give a lot more money to the Society for Redundancy Society, in addition to my mortgage interest deduction, for my charitable contribution to have a specific effect on how much I pay in taxes.

The Tax Policy Center estimates that the number of tax filers claiming itemized deductions for charity will drop by 50 percent in 2018 versus 2017. That by itself is probably a helpful increase in efficiency, since fewer itemized deductions means simpler tax filing for taxpayers as well as less work for the IRS.

At the same time, however, the Tax Policy Center estimates charitable giving will drop by 5 percent as a result of fewer households receiving the tax incentive from itemized deductions. That’s potentially problematic.  Charitable donations in the US totaled an estimated $373 billion in 2016, so a 5 percent drop ($18.65 billion) is a lot of lost philanthropic dollars.

Dr. Joyce Beebe, fellow in public finance at the Baker Institute for Public Policy at Rice University, published a paper last month “Charitable Contributions and the Tax Cuts and Jobs Act of 2017” detailing the effects of changes.

Dr. Joyce Beebe of Baker Center, Rice University

I followed up with Dr. Beebe to get a fuller picture of what we should expect in terms of charitable giving in response to changes in the tax law in general, and changes due to higher household standard deductions in particular. In the course of the conversation I learned a few things about changing views among economists on tax policy and charitable giving.

Before the 1990s, economists had developed a consensus around the belief that incentivizing charitable giving through taxes resulted in greater revenue for charitable organizations than was given up in terms of lost government revenue. The result would be more money overall in society for social services for example, if charitable giving increased more than tax revenue decreased. So that tax incentive toward charitable giving was believed by economists to be efficient.

That earlier view among economists also happened to align with a certain a view of American society as unique in the world. What I mean by that is the particular pride we take in what Alexis de Tocqueville noted as a strong civil society and the tendency to solve problems without government intervention.

De Tocqueville famously wrote in Democracy in America in 1835, “Americans group together to hold fetes, found seminaries, build inns, construct churches, distribute books, dispatch missionaries to the antipodes.” De Tocqueville continued “They establish hospitals, prisons, schools by the same method. Finally, if they wish to highlight a truth or develop an opinion by the encouragement of a great example, they form an association.” Tocqueville argued that what we call charitable organizations is a key component of what makes democracy work in the United States.

Dr. Beebe’s paper notes an estimated 80 percent of global private philanthropic giving for developmental purposes came from US foundations in 2015, indicating that our unique civil society approach – rather than solving problems by government intervention – continues more than 180 years after de Tocqueville’s book described us.

I mention all this to say that charitable giving is at the heart of US political culture, and economists previously believed we had good reason to support that with tax law.

Since the 1990s, however, either because of better data or better measuring techniques, economists have come to believe that the effects of tax policy on charitable giving is much more mixed. We know less than we thought we knew before. But we know some more precise things, according to Dr. Beebe.

Certain types of giving, to one’s church for example as well as giving among lower-income households, is not driven by tax law. That happens despite changes in tax incentives, and we wouldn’t expect that to drop with a higher deduction. Dr. Beebe points out, however, that giving from upper income and upper wealth households tends to be much more responsive to changes in tax incentives.

It’s from upper income households that economists believe the drop in charitable giving will come.

Dr. Beebe estimates that the expected drop in charitable giving will mostly come – maybe 70 percent – from upper income households responding to the higher standard deduction. A smaller, but still notable effect – maybe 30 percent – on charitable giving will come from changes that create a disincentive for wealthier folks from making bequests in order to reduce their estate tax bill.

A 5 percent drop in charitable giving next year isn’t the end of the world. But if you appreciate de Tocqueville’s description, it’s just a small chipping away of something at the foundation of American democracy.


A version of this post ran in the San Antonio Express News and Houston Chronicle.


Please see related posts:

On Philanthropy I – Giving Money Away

On Philanthropy II – Asking For Money


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