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 high-net-worth investors and consumers. Register to receive future issues, directly to your inbox.

The 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. People with higher incomes will also see their effective tax benefit reduced from 37% to 35%. Indiana University's Lilly Family School of Philanthropy estimates that this limit alone will reduce giving by $4.1 billion to about $6.1 billion a year.

In addition, 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 incentives for low- and middle-income taxpayers to donate. Starting next year, approximately 140 million non-itemizing taxpayers will still be able to deduct up to $1,000 in cash donations per filer. About 90% of taxpayers accept the standard deduction since it was introduced in 2017 during the first Trump administration.

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

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

“The nonprofit sector says that every dollar matters, so incentivizing small donations from each household could have a significant impact for certain types of organizations. But the truth is, those types of contributions, however, do not make up the bulk of charitable giving in the charitable sector,” he said. “That two percentage point reduction [for top earners] “It may not seem like a big deal, but you have to consider the scale of gift giving that is happening among the highest net worth 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. That's a 52% increase from 2014.

But while giving is increasing, fewer Americans are giving as wealthy donors account for 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 itself.

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

However, Pasic said, financial stress has limited the giving ability of everyday donors, while the wealthiest have been giving more. The share of Americans who donate fell from 66.2% to 45.8% between 2000 and 2020, according to the university's research.

“Economic uncertainty is always concerning for people's donation planning,” Pasic said.

This unbalanced 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 flights, while wealthier Americans flex their purchasing power.

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

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

Trump's tax bill It also permanently increases the standard deduction, significantly reducing charitable giving, Hungerman said. Their study estimated that the increased deduction led to a permanent annual drop of $16 billion after the 2017 reforms.

However, increasing the limit 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 unbundling, which encourages donations.

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

“Maybe what's even more compelling to me is the long game, if we can send a message that everyone should give this way, and change some of these people's giving behaviors,” 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, retailers and high-net-worth donors will get more bang for their buck if they donate 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 to this year if they were planning to give over the next four years.

Taxpayers can only deduct up to 60% of their adjusted gross income for cash donations to public charities each year. The percentage drops to 30% for contributions from long-term appreciated assets, such as stocks or real estate.

However, taxpayers can generally carry over excess deductions over five years, he said. Still, it's unclear how much they'll get for their money, as the IRS has yet to specify whether excessive 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 aren't sure how, she 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 looking to dispose of appreciated assets, it is much easier to donate stock to a DAF than directly to a nonprofit.

Given the stock's rise this year, Westley said Many of his clients are looking to donate appreciated stocks, especially in technology, to offset gains and rebalance their portfolios.

“Their stocks have appreciated and some of them could now represent a larger percentage of the portfolio than your 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 you do that, you've reduced your risk asset allocation.”

Tax attorneys and planners are still waiting for guidance from the IRS on a number of issues arising from the changes. For example, it is not yet clear whether deductions will be capped for nongrantor trusts that make charitable gifts, according to Westley.

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

Westley said this tactic is popular with his retirement-age clients and will likely become even more so with the SALT limit increase. Taxpayers can reduce their income to qualify for the enhanced SALT deduction, which has a maximum of $40,000 for taxpayers with income of $500,000 or less.

“It's not even about any of the detailed deduction rules,” he said. “There is no limit to the tax benefit and there is no floor or obstacle to overcome for the deduction.”