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Tax Reform: Demystifying the Effects on Charitable Giving

The tax act that Congress passed in December 2017 received a lot of attention, some of which focused on the provisions of the act relating to charitable giving.  This led to a number of gloomy predictions about the act’s effect on incentives to give, but let’s take a closer look at some of what really happened:

1. Increase in annual limit on charitable income tax deduction

This was an unambiguously good thing! Before the act took effect, there was an annual limit on the charitable deduction for gifts of cash, measured as 50% of adjusted gross income (AGI). The act raised that limit to 60% of AGI.

2. Increase in standard deduction

Taxpayers have a choice of either itemizing their charitable deductions on their income tax return, or taking the standard deduction. They take the standard deduction when it is higher than the total of their itemized deductions. However, the tax act nearly doubles the standard deduction, from $12,700 for a married couple filing jointly, to $24,000 for that couple (and from $6,350 to $12,000 for a single taxpayer).

This means that, all other things being equal, many people will be looking harder at taking the standard deduction in lieu of itemizing their deductions.. Some commentators have suggested that these people will decrease or even stop their charitable giving, because they will no longer take a charitable deduction.

But why do people give to begin with? It’s not because of tax incentives, because even with those incentives, a donor is still giving something away. So any donor must first have a motivation to help others.

Take this simplified example: Frieda gave $100 to her local dog shelter in 2017, and took a charitable income tax deduction. Let’s say she was in the 10 percent income tax bracket, itemizes her deductions and takes a $100 charitable deduction.

Does Frieda save $100 in income taxes as a result of this deduction? No. She saves $10 in taxes ($100 gift multiplied by her 10% tax bracket). So, in effect, even with the tax deduction, she is still making a gift of $90.

So, does it make sense for Frieda to just stop giving to the dog shelter in 2018? No!  First, the dogs at the dog shelter surely still need help (I mean, c’mon, just look at their big puppy dog eyes). Second, if she really is so tax-motivated, then she might consider reducing her gift to $90—but not ceasing to give altogether. 

Also, there are these alternatives to consider: 

  • If a donor can afford it, she might “bunch” 2 or more years of giving into one year, and loft herself into itemized deduction territory for the year of that larger gift—and make no gifts, and just take the standard deduction in other years.
  • Or a donor could make that “bunched” tax-deductible gift to a donor advised fund at their friendly local community foundation (I know one) in one year, and then request grants out of that fund in the other years.
3. Increase in federal estate tax exemption

The tax act also raised the exemption from federal gift and estate tax from $5.49 million in 2017 to $11.18 million in 2018--so that a married couple can now shield $22.36 million of wealth from gift and estate tax. 

This means that even fewer people than before will need the estate tax charitable deduction to reduce that tax on their wealth at death. But see above on the question of whether taxes really should be the sole determinant of giving. 

4. College athletic events

We have to talk about this since we are based in central Ohio, and there’s one heckuva serious college football team in town (take a look at 411 Woody Hayes Drive in Columbus).  

Long story short, Congress obliterated the charitable income tax deduction for any portion of the right to buy tickets to a college athletic event. (The purchase of the tickets themselves were never deductible.) But do you really think that people now aren’t going to want to see, say, the Ohio State-Michigan game, and they will stop giving for other important purposes at their favorite university? I mean, if someone loved supporting the vet school before, why would they stop giving to the vet school just because they can’t get any deduction for the right to buy tickets (see above re puppy dog eyes)?

So, should we be gloomy? Of course we can’t say for sure what the effect of the tax act is. Maybe it will turn out that there is a disincentive to give. But let’s not rush to conclusions in these early days. Taxes don’t preordain every action in life—you heard it here first!  It’s possible that Americans will continue to see the needs that charities meet, and will continue or even enhance their charitable giving.

Oct 25, 2018



Brad Britton, J.D., LL.M. is the Director of Planned Giving and General Counsel at The Columbus Foundation.