Can middle-class donors make up the giving gap?
A woman puts money into a Salvation Army red kettle outside of Giant Supermarket in Alexandria, Virginia on November 22, 2023.
Eric Lee | The Washington Post | Getty Images
A version of this article first appeared in CNBC’s Inside Wealth newsletter with Robert Frank, a weekly guide to the high-net-worth investor and consumer. Sign up to receive future editions, straight to your inbox.
New tax laws risk reducing charitable giving by the wealthy next year, economists and academic experts say, leaving less-wealthy Americans to make up the difference.
Under President Donald Trump’s “big beautiful bill,” signed into law in July, several tax benefits for wealthy donors will be reduced. Top earners will also have their effective tax benefit cut from 37% to 35%. The Indiana University Lilly Family School of Philanthropy estimates this cap alone will reduce giving by $4.1 billion to approximately $6.1 billion annually.
In addition, the bill also limits tax incentives for itemizers, who will only be able to deduct donations in excess of 0.5% of their adjusted gross income.
At the same time, the bill also creates new incentives for middle- and lower-income filers to give. Starting next year, roughly 140 million taxpayers who do not itemize will still be able to deduct up to $1,000 in cash donations per filer. About 90% of taxpayers take the standard deduction since it was raised in 2017 during the first Trump administration.
While the tax changes may help broaden the base of giving, making it less dependent on the ultra-wealthy, experts are skeptical that the math will balance out.
Elena Patel, co-director of the Urban-Brookings Tax Policy Center, told Inside Wealth she is not optimistic that middle- and lower-income donors will be able to make up the shortfall as top earners give less.
“The nonprofit sector says that every dollar matters, and so incentivizing small donations from every household could have a meaningful impact for certain kinds of organizations. But the truth is that those kinds of contributions, however, just are not the bulk of charitable giving in the charitable sector,” she said. “That 2-percentage-point reduction [for top earners] might not seem like a big deal, but you have to keep in mind the scale of gifts that are being given among the highest-net-worth individuals in the United States.”
What the ‘K-shaped’ economy means for philanthropy
Charitable giving by American households continues to rise, reaching $392.45 billion last year, per the latest report by the Lilly School of Philanthropy for Giving USA. That’s up 52% since 2014.
But while donations are increasing, fewer Americans are giving as wealthy donors make up an increasing share of philanthropy, according to the university’s research.
Amir Pasic, dean of the Lilly School of Philanthropy, said incentivizing Americans of all income levels to donate is valuable in and of itself.
“We’ve had this general problem of dollars going up but the number of donors going down. This is a positive development because this could really increase the number of donors,” he said.
However, Pasic said, 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.
“Economic uncertainty is always worrisome for people’s giving planning,” Pasic said.
This lopsided, or “K-shaped,” economy shows signs of getting worse amid tariff hikes and inflation. Lower- and middle-income consumers are spending less on everything from McDonald’s burgers to flights, while wealthier Americans flex their spending power.
Will the new deduction move the needle?
Economist Daniel Hungerman said he questions whether the new deduction would spur a substantial number of donations or mainly reward taxpayers who would have given anyway.
While the new deduction is larger, at $1,000 per single filer and $2,000 for married joint filers, a similar legislative effort in the ’80s failed to move the needle on charitable giving, he said. A temporary $300 deduction in 2020 spurred by the Covid pandemic only increased charitable donations by 5%, according to the Tax Foundation.
Trump’s tax bill also permanently raises the standard deduction, which significantly dampens charitable giving, Hungerman said. His study estimated that the higher deduction led to a permanent annual drop of $16 billion after the 2017 reforms.
However, raising the cap on the federal deduction for state and local taxes (better known as SALT) may provide some relief, he said. More taxpayers in high-cost states will benefit from itemizing, which encourages donations.
Hungerman said encouraging everyday donors to get in the habit of giving now could lead to higher…