Tax Reform’s Effect on Charitable Giving and Your Tax Deductions

The tax reforms that went into effect in 2018 had an impact on charitable giving and the tax benefits donors received for their charitable contributions. To learn more about the impact and trends that have emerged since 2018, we spoke with Marqus White, the Tax Leader of Sax LLP’s Not-for-Profit Practice.

Tax Reform’s Effect on Giving 

When asked about tax reform, White shared that, “Tax reform, which went into effect in 2018, did reduce some charitable giving because of the increase in the standard deduction;  the elimination of the miscellaneous 2% itemized deductions; and the limit on state and local and real estate taxes combined to $10,000.” One of the primary adjustments made through the tax reform was a substantial increase in the standard deduction. For singles, the standard deduction rose to $12,000, and for couples, it doubled to $24,000. While this change provided a simplified tax-filing process for many, it also decreased the incentive for taxpayers to itemize deductions, including those related to charitable giving.

With all these changes, tax reform did scale back charitable giving. Charities and nonprofit organizations, which rely heavily on individual donations, have felt the effects of this shift in the tax landscape. The reduction in the number of taxpayers able to claim deductions for their charitable contributions has created challenges for fundraising efforts.

How Donors Can Address the Higher Standard Deduction 

One option donors have to address the higher standard deduction is donation bunching. Donation bunching is a tax strategy that consolidates your donations for two years into a single year to maximize your itemized deduction for the year you make your donations. White says, “If you know you're not going to hit that threshold in one year, maybe give twice as much or three times as much in the current year, and then you don't give [the next year]. The charity now gets three years' worth of contributions in one shot, but they've got a budget for the next couple of years because they're not going to get those dollars on a consistent basis.” 

Can this Ebb and Flow of Giving Be Avoided? 

One option is to invest the money you intend to give into a donor-advised fund. White shares,  “Donor-advised funds serve a purpose because a donor can now put a solid amount of money in and get a deduction for it. Over the next couple of years, they can instruct the fund to give to these various charities so the stream of contributions can continue.”  

Have We Seen the Full Effects of the Tax Reform? 

“I don't think we really saw it,” White shared, “Because of COVID, a lot of organizations were able to get what I would call free money: Paycheck Protection Program one (PPP), PPP two, and Employee Retention Credit. A lot of charities were able to dip into those types of availabilities. Now, the free money is gone. So 2023-24 is going to be a very interesting year and a half. How are organizations going to flourish? Are they able to consistently get those donor dollars? Looking back to 2018, is the tax reform going to affect our charitable giving in the coming couple of months? I think so.”

Interested in more? Check out our Tax Benefits of Giving article, which provides information on what counts as a tax-deductible contribution and strategies you can employ to make sure you receive your deductions.

Disclaimer: This information is provided as a public service to highlight a matter of current interest. It does not constitute a full review of any subject matter nor act as a substitute for obtaining financial or legal advice from an accountant, financial advisor, or attorney.