As the tax-filing season draws near, the partial government shutdown promises to compound challenges and confusion in understanding the Tax Cuts and Jobs Act, which was signed into law in December 2017. Key tax rulings remain pending and there might be limited IRS staff to address taxpayers’ questions.
One key objective of the legislation was to simplify the tax-filing process for many Americans. The new tax law increased the standard deduction from $6,350 to $12,000 for individuals and from $12,700 to $24,000 for couples.
By nearly doubling the standard deduction, the passage of tax reform has the potential to significantly affect charitable giving due to a projected drop in the number of taxpayers who will itemize their deductions.
In addition, tax reform also decreased the top marginal tax rate for individuals and couples from 39.6 percent to 37 percent. Decreasing the top marginal tax rate could also lead to a slight decline in individual/household giving by reducing the tax incentive for these individuals and households to make charitable donations.
The question on the minds of many analysts and not-for-profits is, to what extent will the new tax policy influence giving by Hoosiers?
Based on the most recent IRS data from 2016, about 570,380 donors in Indiana itemized $3.5 billion in charitable donations, or about 3.2 percent of their household income.
These contributions to the charitable sector in Indiana provide invaluable services to individuals and communities in need, as well as strengthen the economy and the job market. Indiana has about 33,000 not-for-profit organizations, according to the U.S. Bureau of Labor Statistics, and they account for 10 percent of the state’s private-sector employment
The Urban-Brookings Tax Policy Center projects that the new tax law will reduce the number of households claiming an itemized deduction for their charitable gifts from 37 million to 16 million in the first year. The changes could lower the federal income tax subsidy for charitable giving by one-third, from $63 billion to $42 billion.
Overall, the tax changes are projected to reduce the marginal tax benefit of giving to charity by raising the after-tax cost of charitable donations. Unless taxpayers increase their charitable donations, not-for-profits that benefited from itemized charitable deductions will likely experience rising burdens associated with the tax reform.
Another aspect of the tax law that can influence charitable giving is the capping of state and local income, sales and property tax deductions at $10,000. This might also reduce the number of individuals who itemize. To remedy the shortfall, several states passed or were considering workarounds to the State and Local Taxes deduction cap, which disproportionately affects high-tax states like Connecticut, California, New York, New Jersey and Oregon.
Although it will take some time to determine the full impact of the Tax Cuts and Jobs Act on philanthropy, multiple reports have examined the effects of the legislation on charitable giving.
The IU Lilly Family School of Philanthropy’s research shows that the “cost of giving”—that is, the amount it actually costs taxpayers to make a gift after taxes—affects how much they contribute to charity. Our analysis of proposed tax-policy changes indicate that tax incentives significantly affect how much people give, as well as the timing of their donations.
Another important factor to consider is how the overall economy will perform in 2019. Households’ financial and economic circumstances are key drivers of both the likelihood and amount of charitable giving. As a result, strengthening the economy is a critical factor to increasing giving among individuals.•
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Osili is professor of economics and associate dean for research and international programs at Indiana University Lilly Family School of Philanthropy. Send comments to firstname.lastname@example.org.