Tax reform slashed charitable giving by $20 billion a year

August 19, 2024

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If you bought your youngsters new back-to-school clothes, you’re probably looking for ways to dispose of the older outfits.

Many parents take advantage of hand-me-downs, either within their own immediate family or sharing with other relatives or friends. Others donate the old, outgrown clothes.

Giving them to a charity could be a win-win.

The nonprofits' recycling not only helps those looking for bargain priced apparel, but in some cases it provides a tax break to filers who itemize.

2017 tax rule changes: That donation deduction, however, hasn’t been claimed as much since enactment of the Tax Cuts and Jobs Act.

The 2017 Republican tax reform law basically doubled standard tax deduction amounts. Even before the law change, most taxpayers already used the easier to claim standard amounts. That number increased even more with the larger TCJA amounts.

So, fewer folks taking advantage of the charitable tax break, whether by giving goods or money.

While that’s been good for filers, it’s hurt charities, according to a new National Bureau of Economic Research (NBER) working paper.

Tax change cut charitable gifts: The TCJA eliminated federal charitable giving incentives for roughly 20 percent of U.S. income-tax payers, according to Xiao Han and Mark Ottoni-Wilhelm of Indiana University and Daniel M. Hungerman of the University of Notre Dame, authors of Tax Incentives for Charitable Giving: New Findings from the TCJA.

The dollar amount also is substantial.

“Overall, the reform decreased charitable giving by about $20 billion annually,” wrote the NBER paper’s authors.

The trio broke down the giving results before and after TCJA took effect in 2018 by type of charitable donation. Their paper also goes into detail on their methodology.

But basically, the NBER study found that TCJA didn’t do secular charities any favors.

Secular nonprofits hurt most: People who typically donate to religious-affiliated charities continued to do so after the new tax law took effect. “[V]ery little, if any, of the TCJA-caused decrease in giving was due to decreased giving to religious congregations,” according to the paper’s authors.

However, nonprofits not affiliated with religious groups, dubbed noncongregational organizations by the authors, took a hit. These are Internal Revenue Service authorized 501(c)(3) organizations that provide support for other charitable purposes, such as helping people with basic needs, arts and culture, and the environment.

“Instead the decrease fell on organizations with other charitable purposes, and among them a large portion fell on organizations that help people in need,” according to the paper.

Return of tax break for standard deduction filers? I know that most people don’t give because of tax benefits. But the NBER papers shows that a sizeable group does.

Since enactment of TCJA, nonprofits have been pushing Congress to allow for at least some tax benefit for donors who don’t itemize.

That was a deduction option for the 2020 and 2021 tax years, found directly on Form 1040. Taxpayers who took the standard deduction in 2020 could claim up to $300 in charitable gifts on that year’s tax return. The tax deduction was enhanced for 2021, allowing jointly filing married couples to take the standard deduction and also claim up to $600 for their donations.

The charitable tax break for standard deduction taxpayers was created to help charities that sustained losses during the COVID-19 pandemic. But it lapsed at the end of 2021.

Nonprofit organizations have continued to lobby Congress in an effort to resurrect the charitable tax deduction for standard filers. This latest research from NBER might help their effort.

You also might find these items of interest:

 

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