Will Middle-Class Donors Step Up to Fill the Giving Gap?

New tax laws might change how Americans give to charity. The changes could make the wealthy give less and encourage middle-class folks to give more. But will it work? The tax bill passed in July has some big changes. It lowers the tax benefit for top earners from 37% to 35%. This could mean $4. 1 billion to $6. 1 billion less in donations each year. The bill also limits how much itemizers can deduct for donations. On the bright side, the bill adds new incentives for middle- and lower-income taxpayers. Starting next year, about 140 million taxpayers who don't itemize can deduct up to $1, 000 in cash donations. This could encourage more people to give. But experts are not sure if this will make up for the shortfall. Elena Patel from the Urban-Brookings Tax Policy Center thinks it won't. She says small donations won't make up for the big gifts from the wealthy. Charitable giving is up overall, reaching $392. 45 billion last year. But fewer Americans are giving. The share of donors dropped from 66. 2% to 45. 8% between 2000 and 2020. This is partly because wealthy donors are giving more, while everyday donors are giving less. Economist Daniel Hungerman is skeptical about the new deduction. He thinks it might not spur many new donations. A similar deduction in the '80s didn't move the needle much. And a temporary $300 deduction in 2020 only increased donations by 5%. But there's a long-term benefit to encouraging everyday donors to give. It could lead to higher levels of donating later if they increase their wealth. Hungerman says it's about changing people's giving habits now. For donors who want to give more, there are options. Taxpayers who plan to take the standard deduction might benefit from waiting until 2026 to make donations. But itemizers and high-income donors should give before the end of the year to get the most tax benefit. Robert Westley from Northern Trust suggests giving to a donor-advised fund (DAF). With a DAF, donors get an upfront deduction but can wait to allocate the funds to specific charities. This is a good option for donors who want to give appreciated assets like stock. High-income donors still have many tools at their disposal. Those who are 73 and older can reduce their taxable income by giving their required minimum distributions from an IRA to charity. This tactic is popular among retirement-age clients.