Can middle-class donors fill the giving gap?

A version of this article first appeared in CNBC’s Inside Wealth newsletter with Robert Frank, a weekly guide for wealthy investors and consumers. Register to receive future editions, straight to your inbox.

New tax laws risk reducing charitable giving by the wealthy next year, economists and academic experts say, leaving less wealthy Americans to make up the difference.

Under President Donald Trump’s “big, beautiful bill,” signed into law in July, several tax benefits granted to wealthy donors will be reduced. High income earners will also see their effective tax benefit reduced from 37% to 35%. The Lilly Family School of Philanthropy at Indiana University estimates that this cap alone will reduce giving by $4.1 billion, to about $6.1 billion per year.

Additionally, the bill also limits tax incentives for retailers, who will only be able to deduct donations that exceed 0.5% of their adjusted gross income.

At the same time, the bill also creates new giving incentives for middle- and low-income tax filers. Starting next year, about 140 million taxpayers who don’t itemize their returns will still be able to deduct up to $1,000 in cash donations per filer. About 90% of taxpayers have taken the standard deduction since it was increased in 2017 under the first Trump administration.

Although the tax changes could help broaden the giving base, making it less dependent on the ultra-wealthy, experts are skeptical that the calculations will balance out.

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

“The nonprofit sector says every dollar counts, and so encouraging small donations from every household could have a significant impact for certain types of organizations. But the truth is that these types of contributions, however, simply do not represent the bulk of charitable giving in the charitable sector,” she said. “This reduction of 2 percentage points [for top earners] This may not seem like a big deal, but you have to keep in mind the magnitude of the gifts that are given to the wealthiest people in the United States. »

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 for Giving USA. This represents an increase of 52% since 2014.

But as donations increase, fewer Americans are giving, as wealthy donors make up a growing share of philanthropy, according to the university’s research.

Amir Pasic, dean of the Lilly School of Philanthropy, said encouraging Americans of all income levels to donate is valuable in its own right.

“We’ve had this general problem of dollars increasing but donors decreasing. That’s a positive development because it could actually increase the number of donors,” he said.

However, Pasic said, financial stress limited ordinary donors’ ability to give, while wealthier ones gave more. The share of Americans donating fell from 66.2% to 45.8% between 2000 and 2020, according to the university’s research.

“Economic uncertainty is always concerning for gift planning,” Pasic said.

This unbalanced, or “K”-shaped, economy is showing signs of deterioration due to tariff hikes and inflation. Low- and middle-income consumers are spending less on everything from McDonald’s burgers to flights, while wealthier Americans are maximizing their purchasing power.

Economist Daniel Hungerman said he questioned whether the new deduction would encourage a substantial number of donations or primarily reward taxpayers who would have donated anyway.

Although the new deduction is larger, at $1,000 per single filer and $2,000 for married joint filers, a similar legislative effort in the 1980s failed to advance charitable giving., he said. A temporary $300 deduction in 2020, spurred by the Covid pandemic, only increased charitable giving by 5%, according to the Tax Foundation.

Trump’s tax bill also permanently increases the standard deduction, significantly dampening charitable giving, Hungerman said. His study estimates that the higher deduction led to a permanent annual decline of $16 billion after the 2017 reforms.

However, raising the cap on the federal deduction for state and local taxes (better known as SALT) could provide some relief, he said. More taxpayers in high-cost states will benefit from the itemization, which encourages donations.

Hungerman said encouraging everyday donors to get into the habit of giving now could lead to higher levels of giving later if they increase their wealth.

“Maybe what I find even more compelling is the long term, if we can send a message that everyone should give in this way, and if we change the generosity behavior of some of these people,” he said. “Somewhere is the Bill Gates of tomorrow.”

Currently, taxpayers considering taking the standard deduction would benefit from waiting until 2026 to make donations. However, donors and high-income donors will get more bang for their buck by giving before the end of the year.

Robert Westley, senior vice president and regional wealth advisor at Northern Trust, said he recommends clients accelerate their giving this year if they plan to donate in the next four years.

Filers can only deduct up to 60% of their adjusted gross income each year for cash donations to public charities. The percentage drops to 30% for contributions of assets appreciated in the long term such as shares or real estate.

However, taxpayers can generally carry forward excess deductions for five years, he said. Still, it’s unclear how much bang for their buck they’ll get, as the IRS has not yet clarified whether excess deductions will be subject to the new charitable deduction floor and cap, according to Westley.

For donors who want to give more now but aren’t sure how to do so, he suggests giving to a donor-advised fund, or DAF. With a DAF, donors receive an upfront deduction but can wait to allocate those funds to specific charities. For donors looking to divest themselves of appreciated assets, it is much simpler to donate stock to a DAF than directly to a nonprofit.

Given this year’s rising inventory, Westley said many of its clients are looking to donate appreciated stocks, particularly in the technology sector, to offset gains and rebalance their portfolios.

“Their stocks have appreciated and some of them may now represent a higher percentage of the portfolio than their target asset allocation,” he said. “When you donate these risk assets to charity, you get a tax benefit, you don’t realize the gain, and when that’s done, you reduce your risk asset allocation.”

Lawyers and tax planners are still awaiting guidance from the IRS on a host of issues arising from the changes. For example, according to Westley, it remains unclear whether deductions will be capped for non-grantor trusts that make charitable donations.

But high-income donors still have plenty of tools at their disposal, he said. High earners ages 73 and older can effectively reduce their taxable income dollar for dollar by making required minimum distributions from an IRA to charity.

Westley said this tactic is popular among his retirement-age clients and will likely become even more popular with the increase in the SALT cap. Filers can reduce their income to qualify for the enhanced SALT deduction, which caps at $40,000 for taxpayers with incomes of $500,000 or less.

“You don’t even deal with any of the itemized deduction rules,” he said. “There is no cap on the tax benefit and there is no floor or hurdle to clear for the deduction.”