Recently I have been getting many inquiries about the impact of the new tax laws on charitable giving and some of you may have seen my recent column in The Examiner about this topic. Many people I get questions from have heard that charitable giving will be down dramatically because fewer people will be able to itemize their charitable deductions. Yes it is true that fewer people will be itemizing with the standard deduction roughly doubled; however, I do not agree with the logic behind the argument that this will negatively impact charitable giving. Let me explain why I don’t agree with the logic of this argument and also share several things from the tax law that will be beneficial for charitable giving.
Yes, the standard deduction has doubled to approximately $12,000 for an individual and $24,000 for a couple. So, the first $24,000 of a family’s income will not be taxed. This will result in many fewer households itemizing their charitable deductions. The estimate is instead of 30% of households itemizing only 5% will itemize. All the doom and gloom talk about a $13 Billion or more decrease in charitable giving resulting from this is based on a study commissioned by the Independent Sector which is a respected advocacy association for nonprofits and philanthropy. The study was conducted by the Indiana University Lilly Family School of Philanthropy another well respected organization. Therefore, some of my colleagues in the nonprofit world may not agree with me when I say I don’t agree with the logic of the study and do not believe that fewer itemizers will result in less charitable giving.
Looking closely at the study I found that the decrease estimated was $4.9 Billion to $13.1 Billion. So the $13 Billion decrease most often quoted is the worst case scenario from the study. And to put this in perspective, the latest report from Giving USA estimates total charitable giving in 2016 was $390 Billion with 80% of this coming from individuals. So the worst case scenario represents a 3% decrease.
My experience with charitable giving throughout my 35 year career in philanthropy is that people are not giving to get a tax deduction. Yes, they certainly appreciate the deduction but it’s not what motivates them to give, it’s the mission of the organization to which they are contributing. My experience also is that lower income earners are often very generous and give a higher percentage of their income than those earning higher incomes. I recall from my days working at United Way my amazement with the generosity of the housekeeping staff at hotels. What I learned from these generous people is that they had friends and family members who had received assistance from a nonprofit and therefore understood the need and felt blessed that they were in a position to give. My gut tells me that a higher standard deduction will result in these lower income earners increasing their charitable giving with more in their paycheck to give. Also, when I dug deeper into the above mentioned study I found in the notes section a statement on Assumptions about non-itemizers: “One limitation that is common to this literature is the assumption that non-itemizers will share a tax-price of giving elasticity with itemizers. In other words, the assumption being made is that their behavior will be the same when it is likely that there are actually some differences in their behavior”. So it seems the even the study’s authors have some questions about this assumption and placed this qualifier in the fine print.
Let’s now turn to several provisions of the tax bill that are very positive for charitable giving. First, the law keeps intact the ability to make Qualified Charitable Distributions (QCDs) directly from your IRA up to $100,000 each year. If you are 70 ½ or older and have Required Minimum Distributions (RMD’s) that you must take from your IRA, making a Qualified Charitable Distribution (QCD) from your IRA to your favorite charity is a tax wise way to make a gift. Distributions of up to $100,000 may be made each year and the amount will count towards your RMD but will not be recognized as income on your tax return. The distribution must come directly from your IRA custodian to the charity. This is a great way to add to your scholarship or designated funds at the Community Foundation using this tool. Unfortunately, it appears that the new tax law still does not allow QCD’s to Donor Advised Funds; however, there seems to be some debate on this point which I will be following closely.
Secondly, taxpayers who itemize may now deduct up to 60% of their adjusted gross income each year, up from 50%. And if they cannot deduct the full amount in the year of the gift the balance can still be carried forward for 5 years. The deduction on appreciated assets (e.g. Stocks) was maintained at 30%. And there is even more good news for those who do itemize their charitable deductions. The Pease limitations that reduced the itemized deductions of higher income earners have been repealed. So those higher income charitable givers are not taking a haircut on their deductions like under previous tax law.
We do anticipate that some of our donors who have a Donor Advised Fund at the Community Foundation may use their fund to bunch their gifts. They might put a larger amount into their fund in one year so they can itemize their charitable gift and then makes grants out of their fund to their favorite charities over several years. So, in other words they may “bunch their charitable giving” into one year to receive a more favorable tax benefit.
The stock market has experienced some volatility this week. So while it is no longer at record highs it has done well over the past year and a donation of appreciated securities continues to be one of the most tax advantaged ways to give. By transferring the securities to your fund at the foundation you avoid the capital gain and also get the charitable deduction for the contribution. Stocks in your portfolio with the largest capital gain are the best to donate.
I do have to admit my crystal ball is not always right. I predicted that the estate tax would be repealed and it was not. However, the estate tax for a married couple now is not a factor for estates less than $22.36 million, up from $10.98 million. So, even fewer households will be impacted by the estate tax.
I am optimistic about charitable giving in 2018 under the new tax law based on the reasons stated, mainly based on my pretty well informed gut. The Giving USA study on charitable giving in 2018 will be published in July of 2019, so I guess I will have to wait until then find out if my gut and logic are correct. Only time will tell.