Can middle-class donors make up the giving gap?

Charitable giving in the United States is facing a significant shift due to new tax laws, which may reduce donations from wealthy individuals. The legislation, signed into law by President Donald Trump, reduces tax benefits for high-net-worth donors and limits tax incentives for itemizers. As a result, economists and academic experts predict that charitable giving could decrease by $4.1 billion to $6.1 billion annually.

The new tax laws also introduce a cap on the effective tax benefit for top earners, reducing it from 37% to 35%. Additionally, itemizers will only be able to deduct donations in excess of 0.5% of their adjusted gross income. While these changes may discourage wealthy donors, the legislation also creates new incentives for middle- and lower-income filers to give. Starting next year, approximately 140 million taxpayers who do not itemize will be able to deduct up to $1,000 in cash donations per filer.

Impact on Charitable Giving

Despite the potential for broader charitable giving, experts are skeptical that the math will balance out. Elena Patel, co-director of the Urban-Brookings Tax Policy Center, notes that the reduction in tax benefits for top earners might not seem significant, but it could have a substantial impact on charitable giving. The nonprofit sector relies heavily on large donations from wealthy individuals, and the new tax laws may lead to a decrease in these donations.

Amir Pasic, dean of the Lilly School of Philanthropy, emphasizes the importance of incentivizing Americans of all income levels to donate. However, he also acknowledges that financial stress has limited everyday donors’ ability to give, while wealthier ones have been donating more. The share of Americans who donate dropped from 66.2% to 45.8% between 2000 and 2020, according to the university’s research.

The “K-Shaped” Economy and Philanthropy

The current economy, characterized as “K-shaped,” shows signs of getting worse amid tariff hikes and inflation. Lower- and middle-income consumers are spending less, while wealthier Americans continue to flex their spending power. This lopsided economy may further exacerbate the decrease in charitable giving, as lower- and middle-income individuals may not be able to make up the shortfall.

Economist Daniel Hungerman questions whether the new deduction will spur a substantial number of donations or mainly reward taxpayers who would have given anyway. He notes that a similar legislative effort in the 1980s failed to increase charitable giving, and a temporary $300 deduction in 2020 only increased donations by 5%.

Strategies for Donors

Given the changes in tax laws, donors may need to adjust their strategies. Taxpayers who plan to take the standard deduction may benefit from waiting until 2026 to make donations, while itemizers and high-income donors may get more bang for their buck by giving before the end of the year. Donors can also consider giving to a donor-advised fund (DAF), which allows them to receive an upfront deduction while allocating funds to specific charities over time.

Robert Westley, senior vice president and regional wealth advisor at Northern Trust, recommends that clients accelerate their donations to this year if they were planning to donate over the next four years. He also suggests donating appreciated stock to a DAF, which can help offset gains and rebalance portfolios. Additionally, high-income donors can effectively reduce their taxable income by giving their required minimum distributions from an IRA to charity.