Two proposals in the Republican tax plan could greatly reduce charitable giving in the United States:
- Double the standard deduction
- Potentially eliminate the deduction for state and local taxes
This table shows the importance of the state and local tax deduction to those who give the most to churches and other charitable organizations.
– Numbers derived from an interactive graphic published in the Washington Post -(https://www.washingtonpost.com/graphics/2017/politics/tax-breaks/?hpid=hp_no-name_graphic-story-a%3Ahomepage%2Fstory&utm_term=.b48a85c5a445)
Most charitable gifts come from wealthier people, but perhaps less obvious is that the tax benefit is a great incentive for some to give generously.
I’m a church treasurer and annual pledges range from a couple hundred dollars to tens of thousands, plus there is a lot of additional giving as needs arise such as hurricane relief over the last month or so. I don’t know the income levels for each donor in the parish, but there are definitely some who have paid off their mortgages, don’t qualify to deduct medical expenses and have a high enough income that they receive very little or no personal or dependent exemptions.
Real estate taxes vary widely based on the community in which a person lives. In Alabama, the property tax burden for a median priced house is only $543 per year. Targeting people in the $200-$500,000 range of income for this analysis, a brand new 4 bedroom, 3-1/2 bath, full brick house with granite countertops and hardwood floors about 20 miles outside Birmingham is probably a better comparison. The property taxes on such a house would be about $1,200. The point here is that the real estate tax for an Alabamian family making $350,000 may be as low as $1,000 while the state income tax burden would be about $16,000.
Eliminating the deduction for state and local income taxes would cut out the #1 deduction for families with annual incomes more than $200,000. For those who have paid off their houses, almost all of their itemized deductions would have to come from charitable donations – unless they don’t donate enough to itemize their deductions. Even for those with a mortgage, there is still a big gap to fill before there’s any tax advantage from charitable giving. For a family with $5,000 in real estate taxes and $9,000 in mortgage interest, they would have to donate $10,000 more to see any income tax advantage by itemizing rather than taking the proposed $24,000 standard deduction. Considering the median charitable deduction was $6,400 in 2015 for returns in the $200-500,000 income range, that’s probably a hard sell for charities.
The higher taxable income will also likely be a deterrent to giving. Without the state and local tax deduction, the average family in the $500,000-$1,000,000 income range would have to pay federal income tax on an additional $36,200. That’s $12,670 more income tax paid at the proposed 35% top tax bracket. Despite the savings from the proposed tax rate changes for the people in the top 1%, it won’t be long before the new lower rate becomes the norm and the loss of the state and local income tax deduction morphs into a big government money grab. People are less charitable when they feel they don’t have control over their own money.
Should the GOP tax plan become law in something like its current form, difficult times are probably coming to many charities and to the people and institutions served by them.