By now, most people have heard of the Tax Cuts and Jobs Act, which was signed into law in December of 2017. But more than a year later, the law still continues to raise questions about how it will affect policy on charitable giving. This report and website – Philanthropy Outlook – from the Lilly School of Philanthropy, summarizes recent research and provides a unique look at entire the landscape of giving over the next two years.
Historically, research has shown that taxpayers adjust how much they donate to qualified charities in a given year based in part on whether their donations are tax deductible and how this deduction affects their tax liability. However, scholars do not agree on exactly how responsive donors are to changes in tax policy.
Although the full impact of the Tax Cuts and Jobs Act (TCJA) on philanthropy still cannot be determined with certainty, multiple reports were released in 2018, which examine the combined effects of various elements of the legislation on charitable giving. Here is a recap of the major provisions of the TCJA that are expected to impact philanthropy in the coming years, as well as results of recent analyses that have estimated how the legislation will affect total giving, primarily as a result of changes in individual/household giving.
Overview of Tax Policy Changes
The TCJA increased the standard deduction from $6,350 in 2017 to $12,000 in 2018 for individuals and from $12,700 in 2017 to $24,000 in 2018 for couples with annual increases for inflation. Nearly doubling the standard deduction may substantially reduce individual/household giving due to a projected drop in the number of taxpayers who itemize their deductions. The law also decreased the top marginal tax rate for individuals and couples from 39.6% to 37%. Decreasing the top marginal tax rate could lead to a slight decline in individual/household giving by reducing the tax incentive to make charitable donations.
Additionally, the TCJA capped the state and local income, sales, and property tax deduction at $10,000. Capping the state and local tax (SALT) deduction may decrease individual/household giving by reducing the number of individuals who itemize, as well as affect to whom high-income households give. As of August 2018, several states had passed, or were considering workarounds to, the SALT deduction cap. For example, New York, New Jersey, Connecticut, and Oregon have approved legislation that provides residents with state tax credits for certain charitable contributions.
Meanwhile, in August 2018, the IRS proposed rules limiting the federal deduction allowable to taxpayers who receive state and local tax credits for charitable donations. With the exception of tax credits for 15 percent or less of the amount contributed, taxpayers claiming the charitable deduction must now reduce the amount claimed on their federal returns by the amount of the state or local credit they received.