The tax changes set to take effect next year could significantly alter the landscape of American philanthropy, with wealthy donors particularly impacted. Historically, high-net-worth individuals have made up a large portion of the nation’s charitable contributions. But as their tax benefits shrink, it remains to be seen whether donations from less affluent households can offset this decline.
The Impact on Wealthy Donors
Under President Trump’s tax overhaul, some major incentives for wealthy donors have been reduced. Among the most notable is a cut in the top earners’ effective tax benefit, which will decrease from 37% to 35%. This alone is expected to reduce charitable donations by several billion dollars annually, according to the Indiana University Lilly Family School of Philanthropy. Furthermore, the bill limits tax deductions for those who itemize, creating an additional barrier for affluent individuals to claim tax breaks on their charitable donations.
These changes come at a time when the wealthy have already been donating at a higher rate than other income groups. According to Amir Pasic, Dean of the Lilly Family School of Philanthropy, while the overall volume of charitable giving in the U.S. has increased, fewer Americans are contributing. The trend is shifting toward wealthier individuals making up a greater portion of donations. Pasic notes that although the new tax laws could encourage a broader base of giving, it’s unlikely that donations from middle-income Americans will match the scale of those from the wealthiest.
New Incentives for Middle-Class Donors
While the new tax reforms reduce benefits for the wealthy, they also introduce incentives aimed at encouraging middle- and lower-income Americans to give. Starting in 2026, taxpayers who take the standard deduction will be able to deduct up to $1,000 in cash donations, with married joint filers able to deduct up to $2,000. This provision is designed to expand the donor base by incentivizing everyday Americans to contribute, even if their donations are smaller than those of the ultra-wealthy.
Despite this, experts remain skeptical about the effectiveness of this move in balancing out the overall decline in charitable contributions. Elena Patel, co-director of the Urban-Brookings Tax Policy Center, expressed concern that the scale of giving from middle- and lower-income households might not be enough to offset the shortfall.
As the economy continues to show signs of strain, particularly with inflation and rising costs affecting lower-income families, it’s unclear whether more Americans will be able to contribute at a level that compensates for the reduced donations from wealthier households.
In the long term, there’s potential for the new tax incentives to foster a culture of giving among a broader range of Americans. Some experts believe that encouraging smaller donations could lead to larger contributions over time, especially if these donors experience an increase in wealth. However, the immediate challenge remains clear: as high-income donors cut back, nonprofits may struggle to maintain their funding.
For now, wealthy donors are urged to accelerate their charitable contributions before the end of the year to maximize their tax benefits. With the IRS still finalizing guidelines on some aspects of the tax changes, donors may need to work with financial advisors to navigate the new landscape.
