One of the (presumably) unintended consequences of the Tax Cuts and Jobs Act of 2018 (TCJA) is the impact that it will have on charitable giving. There are plenty of people who donate money and property to various nonprofit groups for purely philanthropic reasons. However, when there is an institutional subsidy in the form of a tax break in existence, it encourages donors to be more philanthropic. That is the whole point of a tax deduction for charitable giving, it encourages people to give more, because it’s less painful to give your money away when the government pays you to do so. When that subsidy is reduced or eliminated, the opposite effect should also occur. As a result, I believe charitable giving is likely to decline for the following reasons.

Reason 1: Consider the couple that makes enough over a lifetime to pay off their home mortgage, and thankfully does not have a lot of medical costs. Their standard deduction in 2018 will be $24,000. Under the new law, they are limited to $10,000 in state and local income and property taxes that they can deduct. Unless the sum of their allowable state taxes (aggregate max $10k) and donations exceed the standard deduction, the standard deduction is what they will show on their tax return. That leaves a $14,000 gap in deductions that charitable donations would have to fill before the first dollar above $14k would have any impact to their tax liability!

Reason 2: Overall tax rates have declined as a result of the TCJA. Someone who previously was in the 33% bracket may now be in the 22% bracket at the same level of income. A lower tax bracket means that deductions will have less impact to your tax liability. When deductions are worth less, the incentive to incur them is lessened as well.

Reason 3: The estate tax has been pulled out of reach for many estates by the new tax act. Taxable estates now must exceed $11.2 million (double that for a married couple) in order to be exposed to the tax. In the past, charitable giving was always a planning tool considered to reduce the size of estates subject to tax, largely because of the tax impact and the relatively cheap cost to the estate to donate money to favorite charities. Again, without heavy tax subsidies much of these types of bequests and planning tools will likely have less appeal.

It will probably take a year or two for people to realize this. After hearing from their tax professional a couple times that their charitable donations did not help reduce their tax liability, I think public zeal for making large contributions will fade. Time will tell if charities start noticing declines in donations, but I believe this could be a little noticed ramification of the new tax act.

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