Will Middle-Class Donors Step Up to Fill the Giving Gap?

The changes could make the wealthy give less and encourage middle-class folks to give more. But will it work?

Tax Bill Changes

The tax bill passed in July has some big changes:

• Lowers the tax benefit for top earners from 37% to 35%.
• This could mean $4.1 billion to $6.1 billion less in donations each year.
• Limits how much itemizers can deduct for donations.

New Incentives

On the bright side, the bill adds new incentives for middle- and lower-income taxpayers:

• Starting next year, about 140 million taxpayers who don't itemize can deduct up to $1,000 in cash donations.
• This could encourage more people to give.

Expert Opinions

But experts are not sure if this will make up for the shortfall:

• Elena Patel from the Urban-Brookings Tax Policy Center thinks it won't.
• She says small donations won't make up for the big gifts from the wealthy.

Charitable Giving Trends

• Charitable giving is up overall, reaching $392.45 billion last year.
• But fewer Americans are giving. The share of donors dropped from 66.2% to 45.8% between 2000 and 2020.
• This is partly because wealthy donors are giving more, while everyday donors are giving less.

Economic Perspective

Daniel Hungerman, an economist, is skeptical about the new deduction:

• He thinks it might not spur many new donations.
• A similar deduction in the '80s didn't move the needle much.
• A temporary $300 deduction in 2020 only increased donations by 5%.

Long-Term Benefits

However, there's a long-term benefit to encouraging everyday donors to give:

• It could lead to higher levels of donating later if they increase their wealth.
• Hungerman says it's about changing people's giving habits now.

Donation Strategies

For donors who want to give more, there are options:

• Taxpayers who plan to take the standard deduction might benefit from waiting until 2026 to make donations.
• Itemizers and high-income donors should give before the end of the year to get the most tax benefit.

Donor-Advised Funds (DAFs)

Robert Westley from Northern Trust suggests giving to a DAF:

• With a DAF, donors get an upfront deduction but can wait to allocate the funds to specific charities.
• This is a good option for donors who want to give appreciated assets like stock.

High-Income Donors

High-income donors still have many tools at their disposal:

• Those who are 73 and older can reduce their taxable income by giving their required minimum distributions from an IRA to charity.
• This tactic is popular among retirement-age clients.