There’s been a lot of talk about the Tax Cuts and Jobs Act (TCJA). As Kiplinger has reported, the Trump administration tax overhaul (also known as the “Trump tax cuts”) lowered marginal tax rates, almost doubled the standard deduction, and slashed some tax breaks. Some of the law’s provisions are set to expire in 2025.
However, with a GOP-controlled White House, Senate, and House in 2025, a potential renewal of the TCJA may be coming.
In the year the TCJA became effective, 46 million filers stopped itemizing due to the standard deduction increase. Since itemized charitable contributions were no longer available to increase deductions for these filers, there was a period of volatility in charitable giving immediately before and after the TCJA was enacted, according to the Tax Foundation.
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But do itemized deductions directly correlate to gifts to charity? In what ways are the TCJA and charitable giving tied together?
Here are some ways a TCJA extension may help charities, and how you can give back to your local community.
Inflation is impacting charitable giving
According to Giving USA, charitable giving is currently up in terms of dollars, but down when adjusted for inflation. For example, in 2023:
- Individual giving increased 1.6%
- But when adjusted for inflation, donations had actually declined by 2.4%
High inflation typically affects individuals with lower incomes the most. However, as income levels rise, more and more people make charitable gifts, according to Philanthropy Roundtable, a nonprofit philanthropist network. Thus, in terms of charitable giving, high inflation can affect those who are more likely to give larger dollar amounts, like high- and middle-income households.
In fact, the Roundtable shows that middle-class individuals donate about 2-3% of their money annually, which is nothing to sneeze at, considering that the Pew Research Center reports about 51% of the U.S. population is middle-income.
Even if the relationship between charitable giving and inflation is complex, there exists a negative relationship between inflation and monetary donations, as NPR reports. So perhaps a better question would be: why hasn’t charitable giving declined more due to high inflation’s impact on most of the country?
The TCJA and high-income earners
High-income individuals compose about one-third of all individual gifts in the U.S..
And since high-earners are less likely to be affected by high inflation, TCJA savings can still be used for charitable purposes.
A recent report by the Tax Foundation shows that lower marginal tax rates, like those introduced with the TCJA, have a stronger positive effect on charitable giving than incentivized itemization.
The Foundation also reports that, when the TCJA increased the charitable contribution deduction rate from 50% to 60%, wealthier itemizers may have been encouraged to give more than they had previously.
But upper-income individuals make up only 19% of the U.S. population. So while the majority of folks do not have large amounts of disposable income, there may be more ways you can help slow the decline in inflation-adjusted giving.
More nonprofits but less charitable giving: How you can help
While giving, adjusted for inflation, is on a decline, there is a record-high number of nonprofits. And that number is climbing, according to the U.S. Bureau of Labor Statistics.
Per Giving USA, here are the nonprofit sectors that have seen more than 5% inflation-adjusted growth compared to last year:
- Education grew by 6.7%
- Foundations grew by 10.8%
- Public-society benefit (charities fundraising through government grants or other public means) grew by 7.2%
- Arts, culture, and humanities grew by 6.6%
Giving USA also reported that these segments coincided with the giving priorities of the wealthiest donors. So if you would like to help a charity that may not be a priority for high-income earners, here are a couple of ideas:
- Give to your community’s women’s shelter, toy drive, or food bank
- Volunteer at your place of worship, community hospital, or pet shelter
Data show the highest giving year of all time came just three years after the TCJA was enacted, the Tax Policy Center estimates that 53% of taxpayers could see an increase in their tax burden if certain provisions in the TCJA are left to expire.
The U.S. has seen all sorts of questions bubbling up regarding how these other key issues will be handled in the new year. Republicans may want to extend many parts of the bill, although government debt and deficit hawks could want to compromise on some of the provisions.
But while the TCJA doesn't expire until the end of 2025, charities may have a reason to hope for an extension — that is, if inflation goes down.
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