Tax reform and charitable giving

Getting a few dollars knocked of your tax bill probably isn’t the main reason you give to charity. 

If you’re like most of us, you give because you care about the health of children, about a clean environment, or great arts programming, because a neighbor asked you, because quality education is important. You give because you care about the quality of life in our community, and in the world. 

But a little financial incentive certainly doesn’t hurt.

Unfortunately, for approximately 95 percent of Americans, the value of the charitable giving tax deduction is going will disappear under the new tax reform bill passed last week.

This is not to comment on the overall merits or demerits of tax reform. This is to say that the tax incentives for giving – on which we have all relied for longer than we can remember – are going away. 

And it’s to say that it might be a good idea for you to go ahead and make charitable gifts now – on or before December 31, 2017 – so you can take the deduction in the 2017 tax year. 

To be clear, the deduction itself isn’t being eliminated. Rather, by doubling the standard deduction, the proposed tax plan will mean that the vast majority of taxpayers will no longer itemize. Since itemizing is how we take advantage of the charitable giving tax deduction, most taxpayers won’t be able to deduct gifts from their taxable income. 

Let me repeat: We know that a tax deduction is not the primary reason that people give to charity. Study after study has shown that people give because they want to make an impact and because it brings them joy. 

But the ability to take a tax deduction does affect how much people give to charity. That’s not because people are less generous or caring. It’s simply math. 

Say you’re on a tight budget, but you figure out that you can afford to give $75 to your favorite charity. Then, you know you’ll qualify for a tax deduction, so you can really afford to make a $100 gift because you’ll get $25 back at tax time. 

Under the pending tax reform, when you no longer itemize, you won’t be able to deduct that gift. So now, that $100 gift is really going to cost you the full $100. If your budget only accommodates $75, you end up giving $75 instead. 

Who loses? Your favorite charity and, most importantly, those it serves. This worries us.

The undisputed estimates are that tax reform will result in a drop in charitable giving amounting to between $12 billion and $20 billion per year across the nation.

But many taxpayers have the opportunity to maximize the charitable giving tax deduction between now and December 31. While everyone should consult with a financial adviser before making major decisions, there are a couple of tactics that will be advantageous for most people.

First, consider making next year’s charitable gifts right now. If you typically give to certain organizations each year, you (and the recipient) may benefit by accelerating those donations to the 2017 tax year. 

Second, talk to your adviser about whether a donor advised fund or similar vehicle might be right for you. With a donor advised fund, donors make a gift into a fund (like an account) at the Saginaw Community Foundation, take the tax deduction immediately, and then can decide later what nonprofits to support and when, with the added benefit of community knowledge and philanthropic expertise from the foundation team. 

Generosity is a constant in our society. We are confident that next year and after that, amazing donors like you will continue to support things that matter to our community.