While people give to charities for different reasons, some, at least in part, are motivated by the fact that many donations are tax-deductible. However, for some taxpayers, the 2017 Tax Cuts and Jobs Act (TCJA) led to changes in the size of the tax break they received for charitable giving. As a result, some taxpayers are changing their giving strategies, according to a new survey.
While the TCJA still allows donors to receive a tax deduction for qualified charitable donations, you must itemize all of your tax deductions in order to claim it. However, the tax law raised the standard deduction — the tax filing method in which you claim one fixed deduction to lower your taxes rather than itemizing.
When the tax law went into effect, some policy experts raised concerns about how it would impact charitable giving because more people would likely choose the standard deduction, and if you do so, you don’t get to claim a deduction for charitable donations. For example, The Urban-Brookings Tax Policy Center — a think tank focused on tax issues — estimated that fewer people would realize the full extent of their tax benefits from their charitable gifts. This is because the number of households who would claim an itemized tax deduction for their donations would decrease from 37 million to 16 million in 2018, after tax reform.
To see whether taxpayers were adjusting their giving strategies as a result, philanthropic institution Fidelity Charitable surveyed 475 high-net-worth donors who had itemized their tax deductions in two of the last three years.
The study suggests that some taxpayers were caught off-guard by how changes to the tax code may have impacted their personal tax situations. In fact, 32% of respondents were surprised by their tax situation after filing taxes in 2018. Of those who reported being surprised, 55% said their tax situation was worse than they had expected.
Older taxpayers were more likely to be startled, as 40% of baby boomers reported being caught off guard by their tax situation, compared to only 29% of millennials and 23% of Gen Xers.
Half of respondents — 50% — said they made at least one change to their giving strategy because of tax reform:
- 19% changed their giving levels because they lost other tax deductions
- 16% changed their giving levels because the standard deduction increased
- 13% grouped several years’ worth of tax donations to maximize charitable deductions
- 11% donated appreciated stocks to maximize their charitable donations
Tax reform even encouraged some taxpayers to give less. According to the survey, 9% of respondents said they gave fewer charitable dollars in 2018 than the year before, and the tax law was the biggest factor in that decision. In fact, 48% of respondents who gave less in 2018 said tax reform was the reason they did so.
It’s a good idea to have some understanding of how current tax laws will affect your bottom line. For example the TCJA not only could impact your charitable giving deductions, but it can impact the amount of mortgage interest you can deduct. If you recently sold a home, you may also want to look up how the TCJA impacted the tax implications of your sale.