Can middle-class donors make up the giving gap?

A version of this article first appeared in CNBC’s Inside Wealth newsletter with Robert Frank, a weekly guide to the high-net-worth investor and consumer. Sign up 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 for wealthy donors will be reduced. Top earners will also have their effective tax benefit cut from 37% to 35%. The Indiana University Lilly Family School of Philanthropy estimates this cap alone will reduce giving by $4.1 billion to approximately $6.1 billion annually. 

In addition, the bill also limits tax incentives for itemizers, 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 lower-income filers to give. Starting next year, roughly 140 million taxpayers who do not itemize will still be able to deduct up to $1,000 in cash donations per filer. About 90% of taxpayers take the standard deduction since it was raised in 2017 during the first Trump administration.

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

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

“The nonprofit sector says that every dollar matters, and so incentivizing small donations from every household could have a meaningful impact for certain kinds of organizations. But the truth is that those kinds of contributions, however, just are not the bulk of charitable giving in the charitable sector,” she said. “That 2-percentage-point reduction [for top earners] might not seem like a big deal, but you have to keep in mind the scale of gifts that are being 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, per the latest report by the Lilly School of Philanthropy for Giving USA. That’s up 52% since 2014. 

But while donations are increasing, fewer Americans are giving as wealthy donors make up an increasing share of philanthropy, according to the university’s research.

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

“We’ve had this general problem of dollars going up but the number of donors going down. This is a positive development because this could really increase the number of donors,” he said.

However, Pasic said, financial stress has limited everyday donors’ ability to give, while wealthier ones have been donating more. The share of Americans who donate dropped from 66.2% to 45.8% between 2000 and 2020, according to the university’s research. 

“Economic uncertainty is always worrisome for people’s giving planning,” Pasic said.

This lopsided, or “K-shaped,” economy shows signs of getting worse amid tariff hikes and inflation. Lower- and middle-income consumers are spending less on everything from McDonald’s burgers to flights, while wealthier Americans flex their spending power.

Economist Daniel Hungerman said he questions whether the new deduction would spur a substantial number of donations or mainly reward taxpayers who would have given anyway. 

While the new deduction is larger, at $1,000 per single filer and $2,000 for married joint filers, a similar legislative effort in the ’80s failed to move the needle on charitable giving, he said. A temporary $300 deduction in 2020 spurred by the Covid pandemic only increased charitable donations by 5%, according to the Tax Foundation.

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

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

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

“Maybe what is even more compelling to me is the long game, if we can send a message that everybody should give like this, and we change some of these people’s giving behavior,” he said. “Somewhere out there is the Bill Gates of tomorrow.”

Currently, taxpayers who plan to take the standard deduction would benefit from waiting until 2026 to make donations. However, itemizers 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 is recommending that clients accelerate their donations to this year if they were planning to donate over the next four years.  

Filers can only deduct up to 60% of their adjusted gross income for cash donations to public charities per year. The percentage drops to 30% for contributions of long-term appreciated assets like stock or real estate.

However, taxpayers can generally carry forward excess deductions over five years, he said. Still, it’s unclear how much bang they will get for their buck as the IRS has yet to specify whether excess deductions will be subject to the new floor and ceiling on charitable deductions, according to Westley.

For donors who want to give more now but are unsure of how to do so, he said he suggests giving to a donor-advised fund, or DAF. With a DAF, donors get an upfront deduction but can wait to allocate those funds to specific charities. For donors wanting to offload appreciated assets, it is much simpler to donate stock to a DAF than directly to a nonprofit.

Given this year’s stock run up, Westley said many of his clients are looking to donate appreciated stock, especially in tech, to offset gains as well as rebalance their portfolios.

“Their equities have appreciated, and some of them might now represent a higher percentage of the portfolio than their target asset allocation,” he said. “When you donate those risk assets to charity, you get the tax benefit, you don’t realize the gain, and when it’s done you’ve lowered your risk-asset allocation.”

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

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

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

“You’re not even dealing with any of the itemized deduction rules,” he said. “There’s no ceiling on the tax benefit and there’s no floor or hurdle to get over for the deduction.”