It remains to be seen exactly how charitable giving will be impacted by tax reform legislation passed last month but the latest estimate has the number of taxpayers who itemize dropping from 37 million to 16 million.
The most recent estimate comes from Howard Gleckman, senior fellow at the Tax Policy Center (TPC) of the Urban Institute and Brookings Institution. The Tax Cuts and Jobs Act (TCJA) will reduce the federal income tax subsidy for charitable giving by one-third, from about $63 billion to about $42 billion, Gleckman wrote on TaxVox, a TPC blog.
When tax reform first was floated last year, preliminary estimates suggested that the number of itemizers would drop from about 1 in 3 taxpayers to about 1 in 20, about 5 percent, primarily due to doubling the standard deduction. The latest estimate pegs itemizers at about 1 in 7 taxpayers, or about 14 percent.
Among the reasons that fewer taxpayers will itemize is increasing the standard deduction from about $6,300 to $12,000 for individuals, up to $24,000 for couples. Tax reform also capped the state and local tax deductions at $10,000.
The roughly 16 million who will continue to itemize gave an estimated 75 percent of the $221 billion deducted by individuals in 2015, and accounting for about 60 percent of individual giving that year, according to Robert Sharpe, chief consultant at Sharpe Group, a Memphis, Tenn.-based consultancy. Those who will probably not itemize anymore gave about 18 percent of total individual giving in 2015, he said. “No one knows how many will not give or reduce,” Sharpe said, but a 3-percent decline in giving could be offset by current economic growth.
Overall giving could decline between 1.7 percent and 4.6 percent, or about $5 billion to $16 billion, as a result of doubling the standard deduction, according to a study last spring by the Lilly Family School of Philanthropy at Indiana University.
Overall, the TCJA will reduce the marginal tax benefit of giving to charity by more than one-quarter this year, raising the after-tax cost of donating by about 7 percent, Gleckman said.
Tax reform also lowered individual income tax rates, reducing the value of all tax deductions, and doubled the estate tax exemption to $22 million for couples, which will discourage tax-motivated bequests by some very wealth households, Gleckman said.
The share of middle-income households claiming the charitable deduction will fall from about 17 percent to 5.5 percent, according to Gleckman.
Because fewer relatively small givers will continue to deduct their gifts to nonprofits, Gleckman said, the average tax benefit from charitable deductions for all households will increase from about $1,700 to $2,600. Individual income tax changes also will reduce the average marginal tax benefit of charitable giving from 20.7 percent to 15.2 percent, he said.