Tax Law Could Have Charitable Ripple Effects on Tax Returns

A new report from the American Enterprise Institute makes the case that the Tax Cuts and Jobs Act (TCJA) could create some unexpected issues for charities.

AEI’s report, Charitable Giving and the Tax Cuts and Jobs Act  (opens in a new tab), argues that the new tax reform law will lead to a 4 percent decrease in charitable giving—a collective cost as high as $17.2 billion. That drop will predominantly be caused by an increase in the number of people who take the standard deduction, which has almost doubled in size. AEI notes in the report  (opens in a new tab) [PDF] that the deduction increased from $6,300 to $12,000 for single adults and went from $12,600 to $24,000 for married couples.

“As a result,” report authors Alex Brill and Derrick Choe write, “many taxpayers who otherwise would have deducted their charitable donations as itemizers will now claim the standard deduction and not receive a tax incentive for giving.”

The report makes the case that, even when people donate for purely altruistic reasons, factors such as tax code can affect the amount they’ll donate.

The authors analyze two potential solutions to this problem to help protect charitable donations. One would add an additional above-the-line deduction for charitable donations that exists even for those who take the standard deduction, and the other is a flat-rate replacement of the charitable deduction with a nonrefundable 25 percent tax credit.

While the report says that both could potentially help solve the problem by making such donations less costly, it notes that their impact differs widely. This is a significant difference in revenue costs and distributional impact from the two solutions, with the above-the-line deduction costing less and the tax credit potentially raising more charitable revenue.

Ultimately, the strategies could help ease the impact of the tax law changes on charities, with the authors concluding that an above-the-line deduction of $500 for single adults and $1,000 for married couples would most closely match the state of affairs before the passage of the tax law.

“Without repealing any of the recent reforms, additional tax policy changes could reverse the impact of the TCJA on charitable giving,” the authors state.

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