If key provisions of this act are allowed to expire, untold dollars will pass from the hands of charitably minded individuals to the coffers of the federal government, stifling philanthropic giving.
I don’t know about you, but every time April rolls around, I wish I had been more generous with my giving the previous December. While the April 15 tax deadline may be behind us, tax policy remains top of mind for those of us in the philanthropic sector. With several key provisions of the Tax Cuts and Jobs Act (TCJA) set to expire in December 2025, there is likely to be a dramatic shift in the philanthropic landscape. The Philanthropy Roundtable recently released a comprehensive brief on TCJA and the pending policy changes. The full brief can be accessed here.
Basic economics teaches us that incentives and choices matter. As a result of expiring tax cuts and changes to incentives for charitable giving, the choice of whether—and how much—individuals give to nonprofits will be a more difficult one. Increased tax burdens on many individuals and households may mean less disposable income, which is tied directly to charitable giving.
Potential changes to the standard deduction, the charitable contribution deduction, estate taxes, and many other tax provisions that incentivize giving to the nonprofit sector may be in the offing. Each of those changes would have hefty consequences for donors and, by extension, nonprofits.
Reducing the Standard Deduction
Many of the TCJA provisions set to expire are ones millions of Americans take advantage of to reduce their tax burden. The standard deduction, which currently allows married couples filing jointly to reduce their taxable income by $29,200, would be reduced to $12,700 per couple if those parts of the TCJA are allowed to expire. (For individual filers, the standard deduction would reduce from $14,600 to $6,350.)
This change would mean an increase in overall taxable income for American families, which decreases disposable income, cutting into the resources that could be directed to nonprofits.
Lowering the Estate Tax Exemption
Similarly, the estate tax exemption (under which no estate tax is owed) would decrease from more than $27 million for couples to just under $11 million. In this instance, someone hoping to make an estate gift to a charity might find themselves forced to hand that money to the government instead. Such a change is at odds with the American tradition of generational philanthropy. Rather than leaving behind the resources to support nonprofits for years to come, a wealth-creator would see said wealth swelling the coffers of the IRS. This represents a startling shift from encouraging support of more responsive and locally focused nonprofits to sending those funds to the government to distribute as they see fit.
This is decidedly undemocratic and unequivocally opposed to America’s rich tradition of philanthropy.
Reducing the Charitable Contribution Deduction
Taxpayers hoping to reduce their tax burden by making charitable donations above and beyond the standard deduction will also be affected by the potential changes. Presently, taxpayers can deduct cash donations up to 60 percent of their adjusted gross income (AGI). At the end of 2025, this deduction would be limited to 50 percent of AGI, potentially impacting the tax benefits of large charitable donations.
Let’s say, for example, that a donor with an adjusted gross income of $200,000 donates $120,000 to public charities. Under the TCJA as it exists today, they can deduct that full amount—60 percent of their AGI—significantly reducing their taxable income. Shrinking the deduction from 60 percent to 50 percent—as it would if the TCJA is allowed to expire—will lead to a reduced incentive to give, particularly among high-income donors and tax-conscious philanthropists.
Giving USA data from 2020 and 2021 demonstrate the deduction limit’s impact on giving when the CARES Act increased the limit from which charitable deductions could be claimed against AGI from 60 to 100 percent. Nonprofits saw increased giving as donors responded to a “generosity incentive.” If such incentives are reduced or removed, charitable giving will almost certainly decrease.
Further Changes to Consider
Besides renewing the above provisions of the TCJA, there are other important changes that Congress should consider.
Perhaps the most obvious involves the qualified charitable distribution (QCD). Under current law, donors may give directly from their Individual Retirement Accounts (IRAs) to charities, bypassing the tax burden on those accounts. However, retirement accounts like 401(k)s and 403(b)s are not included in that advantageous policy. Allowing someone to make a QCD regardless of their retirement account type would promote and simplify giving.
Another way to encourage giving would be to allow retirement account rollovers to donor-advised funds (DAFs). Currently, such a rollover incurs a tax penalty, making this giving avenue less appealing. The government should not discriminate based on what vehicle a person chooses for investing for retirement or how they choose to use the funds in that account.
Other Misguided Ideas
Other proposals that would have a negative impact on the charitable landscape include a 25 percent tax on unrealized gains of those with net assets above $100 million, capping lifetime charitable deductions for donors at $500 million, and taxing endowments.
All of these proposals would adversely—and unnecessarily—impact charitable giving. Proposals to tax unrealized gains would reduce the amount individuals and foundations can disburse to charitable entities. Capping deductions would mean ultra-wealthy individuals would face a substantially reduced incentive to continue to engage in philanthropy. Taxing endowments, while politically popular with some, may mean that many smaller colleges will face an increased tax burden and be forced to devote less money to research and scholarships.
Conclusion
There is much to be gained from extending or making permanent the provisions of the TCJA that encourage philanthropy. Ultimately, proposals that leave more money in the hands of individuals to disburse how they see fit will benefit our society much more than those that give more money to our bloated, unresponsive government.