Can middle-class donors close the giving gap?

A version of this article first appeared in CNBC’s Inside Wealth newsletter with Robert Frank, a weekly guide for the high-net-worth investor and consumer. subscription To receive future issues, directly to your inbox.

Economists and academic experts say new tax laws risk cutting into the wealthy’s charitable giving next year, leaving less wealthy Americans to make up the difference.

Under President Donald Trump’s “big beautiful bill,” signed into law in July, many tax benefits for wealthy donors would be reduced. Higher earners will also receive a reduction in their effective tax benefit from 37% to 35%. Indiana University’s Lilly Family School of Philanthropy estimates that this cap alone would reduce giving by $4.1 billion to approximately $6.1 billion annually.

In addition, the bill also limits tax incentives for designers, who will only be able to deduct donations in excess of 0.5% of their adjusted gross income.

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

While the tax changes may help broaden the giving base, making it less dependent on the wealthy, experts are skeptical that the calculations will balance out.

Elena Patel, co-director of the Tax Policy Center at Urban-Brookings, told Inside Wealth she’s not optimistic that middle- and lower-income donors will be able to make up the shortfall since higher earners are giving less.

“The nonprofit sector says every dollar counts, so incentivizing small donations from each family can have a beneficial impact on certain types of organizations,” she said. “But the reality is that these types of contributions, however, are not the bulk of charitable giving in the philanthropic sector.” “This reduction is two percentage points [for top earners] “That may not seem like a big deal, but you have to consider the amount of gifts that are given among the highest net worth individuals 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 is an increase of 52% since 2014.

But while donations are increasing, fewer Americans are giving, with wealthy donors making up a growing share of charitable giving, according to the university’s research.

Amir Bacik, dean of the Lilly College of Philanthropy, said that motivating Americans of all income levels to donate is valuable in itself.

“We’ve had this general problem of higher dollars and fewer donors,” he said. “This is a positive development because it could actually increase the number of donors.”

However, Basic said, financial pressures have limited the ability of everyday donors to donate, while wealthy people are giving more. The percentage of Americans who donate fell from 66.2% to 45.8% between 2000 and 2020, according to university research.

“Economic uncertainty is always worrying for people who plan to give,” Basic said.

This unbalanced, or “K-shaped,” economy is showing signs of deteriorating amid rising tariffs and inflation. Low- and middle-income consumers are spending less on everything from McDonald’s burgers to flights, while wealthier Americans are adjusting their purchasing power.

Economist Daniel Hongerman said he wonders whether the new deduction will stimulate a large number of donations or essentially reward taxpayers who would have donated anyway.

While the new deduction is larger, at $1,000 for single filers and $2,000 for married joint filers, a similar legislative effort in the 1980s failed to move the needle on charitable giving, He said. A temporary $300 deduction in 2020 due to the Covid pandemic increased charitable donations by just 5%, according to the Tax Foundation.

Trump’s tax bill It also permanently raises the standard deduction, which significantly reduces charitable giving, Hungerman said. His study estimated that higher withholding led to a permanent annual decline of $16 billion after the 2017 reforms.

However, he said that raising the maximum federal deduction for state and local taxes (known as SALT) may provide some relief. More taxpayers in high-cost states would benefit from the itemization, encouraging donations.

Encouraging regular donors to get into the habit of donating now can lead to higher levels of giving later if they increase their wealth, Hungerman said.

“Probably the most compelling thing for me is the long game, if we can send the message that everyone should give in this way, and we change some of these people’s giving behaviors,” he said. “Somewhere out there is the Bill Gates of tomorrow.”

For now, taxpayers who plan to take the standard deduction will benefit from waiting until 2026 to make donations. However, sponsors and high-income donors will get more money by donating 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 give over the next four years.

Filers can only deduct up to 60% of their adjusted gross income for cash donations to public charities annually. The percentage drops to 30% for contributions to assets with long-term value such as stocks or real estate.

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

For donors who want to give more now but aren’t sure how to do so, he said he suggests donating to a donor-advised fund, or DAF. With a DAF, donors get an upfront discount but can wait to allocate those funds to specific charities. For donors wanting to unload appreciated assets, donating inventory to a DAF is much easier than donating directly to a nonprofit.

Due to the high inventory this year, Westley said Many of his clients are looking to donate value stocks, especially in technology, to offset gains as well as rebalance their portfolios.

“Their stocks have risen in value, and some of them may now represent a higher percentage of the portfolio than their target asset allocation,” he said. “When you donate those risky assets to charity, you get the tax benefit, you don’t realize the gain, and when you do you have reduced your allocation to risky assets.”

Attorneys and tax planners are still waiting for guidance from the IRS on a range of issues stemming from the changes. For example, it’s still unclear whether deductions will be capped for non-donor trusts that make charitable donations, according to Westley.

But he said high-income donors still have many tools at their disposal. Top earners age 73 or older can effectively reduce their taxable income dollar for dollar by giving required minimum distributions from their IRA to charity.

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

“You’re not even dealing with any of the detailed deduction rules,” he said. “There is no ceiling on the tax benefit and no minimum or hurdle to exceed the deduction.”