New tax deduction rules could mean more donors but less money for nonprofits

One big change in this year’s federal budget reconciliation bill affects how taxpayers calculate deductions for their charitable giving.

It’s likely to change charitable giving in this country, according to a new report from the Lilly Family School of Philanthropy at Indiana University. More Americans are likely to make donations under the law, the report says, but they’re likely to give less money in total — some $5.7 billion less each year.

The changes do not impact the returns taxpayers are filing right now, said Jon Bergdoll, one of the researchers on the IU study.

“But in terms of their actions this year and for the taxes they file next year,” he said, “all of these effects that we're discussing today are in place.”

The vast majority of households take the standard deduction, which increased under the new law. 

Bergdoll said before the changes, those filers haven’t been able to get any sort of tax incentive at a federal level for charitable giving.

The new law lets a single filer deduct up to $1,000 of contributions, which should encourage more people to start making small donations, Bergdoll said.

“We see it adding a significant number of new donors, around 8 million new donors, back into the donor pool,” he said.

Filers who do itemize tend to have higher incomes and make bigger contributions, said Erica York at the Tax Foundation.

Under the new law, she said, filers need to give at least 0.5% of their adjusted gross income to kick in that itemized deduction.  

The law also limits itemized deductions for the highest bracket.

“So instead of someone in the 37% tax bracket getting to deduct their itemized deductions against that 37 rate, they deduct it against the … 35% rate,” she said.

Ultimately, York said, changing incentives may impact taxpayers on the margins.

“But overall … it's not going to be a massive effect,” she said.

The Indiana University study estimated that the changes would result in about a 1% decrease in giving. 

That’s not great news for nonprofits in today’s environment, said Ray Madoff, a professor at Boston College Law School.

“Funding for all sorts of organizations has been drastically cut by the federal government, and there's nothing that will increase the likelihood of charitable giving making up that slack,” she said.

Which Madoff says puts charities in a tough position going forward.