The Charitable Deduction Odyssey

Individual income tax deduction for charitable giving provides a substantial incentive to give by reducing the economic cost of donating, according to the Tax Policy Center Briefing Book. In 2018, charitable giving by individuals was estimated to reach $299 billion at an annual revenue loss of around $44 billion.

Charitable giving patterns differ by income. The charitable deduction provides higher income taxpayers with a larger tax subsidy per dollar donated, because such taxpayers are more likely to itemize deductions and because they generally face higher tax rates.

The Policy Center said the charitable deduction is estimated to cost approximately $54 billion in 2018 and $240 billion over five years (2017 through 2021). The relationship between the revenue loss and amount of additional giving created has significant policy implications.

For example, if the loss in federal revenue from allowing the charitable deduction is greater than the increase in charitable giving caused by the deduction, then a portion of the federal subsidy is going to donors rather than to the ultimate beneficiaries of charitable gifts. To the extent that Congress views charitable and government efforts as direct substitutes, it might be more efficient to eliminate the deduction and provide charities with direct federal support.

MarketWatch set the stage for 2018 giving by stating that the Tax Cuts and Jobs Act doubled the standard deduction. The standard deduction rose from $6,350 in 2017 to $12,000 for single individuals and from $12,700 to $24,000 for those married filing jointly.

Dr. Patrick Rooney said at that time, households would likely donate an estimated $13.1 billion less per year. It was noted that donors may double up charitable donations every other year to exceed the standard deduction. Taxpayers may also donate the bunched amount to a donor advised fund, which has its own tax implications.

MarketWatch said that President Donald Trump signed the tax bill in December 2017, and charitable donations from individuals fell in 2018. So far this tax season, 11 million taxpayers have itemized deductions for charitable contributions compared to 31 million at this point in 2018.

According to Giving USA, charities took in $427.71 billion overall in 2018. When adjusted for inflation, the figure represented a 1.7% decline in overall giving. MarketWatch noted that a volatile stock market has rattled investors’ nerves, people are more concerned with tax returns plus religion and education are upstaged by climate change as a primary fundraising focus.

In the article titled, “What Fundraisers Should Do Next: How ‘Giving USA’ Findings Point to Smart Strategies,” it said that fundraisers going forward should emphasize the charitable mission; seek out small-dollar donors; ask donors to give more and give monthly; find new funding sources; and acknowledge gifts from donor-advised funds.

The long-term ramifications from the tax law remain uncertain currently. With the dollar amount of donations from individual Americans dropping by 1.1% last year and the possibilities of bundling gifts to every other year a real possibility, fundraisers need to step up their game and seek donations to fill potential shortfalls. We need to know our major donors better and validate their motivations for giving. Are the motivations tax incentive based, love for charitable causes or some other reason?

As a significant donor myself, based upon percentage of income to charity, for the first time ever last year I did not itemize charitable contributions. I would have had to bundle this year and possibly next year to validate itemization. This scenario makes you determine your true motivation for giving to charity. With contributions falling by 2% and donors by 6% in the first quarter of 2019, according to the Fundraising Effectiveness Project, 2018’s tough giving year may continue in 2019. We better prepare ourselves for every potential revenue outcome eventuality, study research trends and seek ways to generate new revenue from a wider variety of sources.