Can middle-class donors close the giving gap?

A version of this article first appeared in CNBC’s Inside Wealth newsletter by Robert Frank, a weekly guide for high-net-worth investors and consumers. Sign up to receive future editions directly to your inbox.

Economists and academic experts say the new tax law could reduce charitable giving by the wealthy next year, leaving less wealthy Americans to pick up the difference.

Under President Donald Trump’s “Big and Beautiful Bill,” signed into law in July, several tax breaks for wealthy donors would be cut. The effective tax benefit for high earners will also be reduced from 37% to 35%. Indiana University’s Lilly Family School of Philanthropy estimates that this cap alone would reduce giving by $4.1 billion annually to about $6.1 billion.

The bill also limits tax benefits for itemizers, allowing them to deduct only contributions that exceed 0.5% of their adjusted gross income.

At the same time, the bill provides new incentives for filers in middle- and low-income brackets. Starting next year, the roughly 140 million taxpayers who don’t itemize will also be able to deduct cash donations of up to $1,000 per filer. About 90% of taxpayers have taken advantage of the standard deduction since it was raised in 2017 during the first Trump administration.

Tax changes may help broaden the base of giving and reduce dependence on the super-wealthy, but experts are skeptical that the math is proportionate.

Elena Patel, co-director of the Urban-Brookings Tax Policy Center, told Inside Wealth that she is not optimistic that low- and middle-income donors will be able to make up the shortfall because high-income earners are contributing less.

“The nonprofit sector claims that every dollar counts, so encouraging small donations from households can have a meaningful impact for certain types of organizations. The truth is, however, that those types of donations are not actually the majority of charitable giving in the philanthropic sector,” she said. “A 2 percentage point reduction[for high earners]may not seem like a big deal, but you have to keep in mind the scale of gift giving among wealthy Americans.”

Charitable giving by American households continues to rise, reaching $392.45 billion last year, according to the latest report from the Lilly School of Philanthropy. This is an increase of 52% since 2014.

However, the university’s research shows that although donations are increasing, fewer Americans are giving because wealthy donors account for an increasing share of philanthropy.

Amir Pasik, dean of the Lilly School of Philanthropy, said encouraging Americans of all income levels to donate is valuable in itself.

“There has been a general problem of the dollar going up but the number of donors going down. This is a positive development because this could actually increase the number of donors,” he said.

But Pasic said financial stress is limiting donors’ ability to give on a daily basis, and wealthy people are giving more. According to the university’s research, the percentage of Americans who donate decreased from 66.2% to 45.8% between 2000 and 2020.

“Financial uncertainty is always a concern for people’s giving plans,” Pasich said.

This lopsided, or “K-shaped,” economy shows signs of worsening amid rising tariffs and inflation. Low- and middle-income consumers are spending less on everything from McDonald’s burgers to airline tickets, while wealthier Americans are flexing their purchasing power.

Economist Daniel Hungerman said he doubted whether the new deduction would encourage significant donations or whether it would primarily reward taxpayers who would have donated anyway.

Although the new deduction is higher at $1,000 for single filers and $2,000 for married joint filers, similar legislative efforts in the 1980s failed to change the direction of charitable giving, he said. A temporary $300 deduction in 2020 due to the coronavirus pandemic only increased charitable giving by 5%, according to the Tax Foundation.

President Trump’s tax bill would permanently raise the basic tax deduction and significantly curb charitable giving, Hungerman said. His research estimates that the increased deductions led to a permanent reduction of $16 billion per year after the 2017 reforms.

But he said raising the cap on the federal deduction for state and local taxes, better known as SALT, could provide some relief. More taxpayers in high-spending states would benefit from itemization that facilitates giving.

Hungerman said encouraging everyday donors to get into the habit of giving now could lead to higher levels of giving later on as their assets grow.

“Perhaps what’s even more appealing to me is that if we can send a message like this that everyone should donate and change some people’s donating behavior, it might be a long game,” he said. “Somewhere there is tomorrow’s Bill Gates.”

Taxpayers currently due to receive the basic tax deduction will benefit if they wait until 2026 to donate. However, those who list items and high-income donors can get more in return by donating before the end of the year.

Robert Westley, Northern Trust’s senior vice president and regional wealth advisor, said that if clients have plans to donate in the next four years, they encourage them to accelerate their contributions to this year.

Filers can only deduct up to 60% of their adjusted gross income per year for cash contributions to public charities. For gifts of assets with high long-term value, such as stocks or real estate, this percentage drops to 30%.

However, he said taxpayers can generally carry over excess deductions over a five-year period. Still, Westley said the IRS hasn’t yet clarified whether the excess deductions will be subject to the new charitable deduction floor and ceiling, so it’s unclear how much you’ll get for your money.

For donors who would like to give more but don’t know how, he said he suggests giving to a donor-advised fund (DAF). With a DAF, donors can take an upfront deduction but wait to allocate the funds to a specific charity. For donors who want to sell appreciated assets, it is much easier to donate stock to a DAF than to donate stock directly to a nonprofit.

Given this year’s rise in stock prices, Westley said many of his clients are looking to donate rising stocks, especially tech stocks, to offset the gains and rebalance their portfolios.

“Their stocks have gone up, and some of them may be a higher percentage of their portfolio than their target asset allocation,” he said. “If you donate these risky assets to charity, you may receive tax benefits, but you won’t realize any benefit and your risky asset allocation will have gone down by the time the donation is over.”

Lawyers and tax planners are still awaiting guidance from the IRS on a range of issues arising from this change. For example, Westley said it’s still unclear whether there will be a cap on deductions for non-granting trusts that make charitable gifts.

But high-income donors still have more tools at their disposal, he said. High earners over age 73 can effectively reduce their taxable income dollar for dollar by contributing required minimum distributions from their IRAs to charity.

Mr Westley said the tactic was popular among retirement-age customers and could become even more popular with the increased SALT cap. Filers can reduce their income to qualify for the enhanced SALT deduction of up to $40,000 for taxpayers with incomes of $500,000 or less.

“It doesn’t address any of the itemized deduction rules,” he said. “Tax benefits have no caps, and deductions have no floors or hurdles to overcome.”