Charitable Giving and the Inflation Reduction Act

How does the Inflation Reduction Act of 2022 stack up against the 2017 Tax Cuts and Jobs Act (TCJA), the 2020 CARES Act, and the 2020 Taxpayer Certainty and Disaster Tax Relief (TCDTR) Act in how it effects charitable giving?

The 2017 TCJA increased the standard deduction, likely reducing the number of taxpayers who received income tax benefits from itemizing their charitable deductions.  Worries emerged that less itemizers would result in less individual donations.[1]  The verdict is still out on that worry.  The 2020 CARES Act created a $300 a “universal charitable deduction” for 2020 donations for non-itemizers, lifted caps on annual contributions, and raised the annual limit for corporations.  The TCDTR Act extended those benefits through the end of 2021.  The results?  Giving in 2020 increased 5.1% from the previous year to $471B and in 2021 giving increased 4% to $484B according to Giving USA.  However, after adjusting for inflation, giving in constant dollars remained flat (-0.7%) both years as the number of donating individuals decreased and mega gifts from billionaires increased to $15B.[2]

Charitable giving benefits most from what was NOT changed by the Inflation Reduction Act:

• Individuals age 70½ and older can still donate up to $100,000 per year tax-free from their Individual Retirement Accounts (IRAs) to operating charities and enjoy the benefits of such a donation such as an exclusion from annual income, a reduced IRA balance, a reduced future Required Minimum Distributions, a lower taxable estate, and potential reductions to their beneficiaries’ future tax liabilities. If married, each spouse can donate up to $100,000 from their separate
• Individuals can still choose to give beyond annual charitable deduction limits and carry forward the excess amounts on their itemized tax returns for up to five years.
• An individual still can front-load or bundle their donations within one tax year to maximize their itemized charitable gifts to a favorite cause, or to donor-advised funds for future distribution.
• Appreciated stocks and other non-cash assets can still be donated to charities and donors enjoy the satisfaction of giving enhanced cash benefits to charities now for an asset purchased at lower costs while avoiding payment of capital gains taxes on that higher value.
• Gifts of an applicable partnership interest to charity remain a nontaxable transfer.[3]

However, charitable giving also loses from what was NOT in the Inflation Reduction Act:

• The ability of itemizing individual taxpayers to deduct total cash giving of 100% of their adjusted gross income (AGI) on their tax return to qualified exempt charities was not renewed for 2022. The AGI limitation has reverted back to 60% of AGI.
• The “universal charitable deduction” allowing individuals to deduct cash gifts up to $300 (and $600 for couples) on their tax return without having to itemize was also not renewed by the Inflation Reduction Act.

The Act’s sweeping changes related to climate change presented opportunities for tax strategies, tax breaks and other savings, but will they effect charitable giving?  Two energy provisions are made retroactive to the beginning of 2022 and extended through 2033:[4]

• Installing Nonbusiness Energy Property – heat pumps, insulation, doors, and windows – results in a credit of 30% of cost, with a $1,200 annual cap (previously a $500 lifetime cap), and;
• The credit for Residential Clean Energy – solar, wind, geothermal, and battery storage – is increased from 26% to 30%.

These tax credits not only impact individuals but organizations are also eligible for these credits including 501c3 nonprofits like schools, hospitals, places of worship and others investing in clean energy technology for their own use or as a program-related investment.  Embedded in the energy security and climate change portions of the bill is $60B for environmental justice, which includes grants targeting community-led projects in disadvantaged communities to address those disproportionately impacted by climate change.[5]  Can these provisions of the Act, and its record spending of $369B to combat climate change, be leveraged by environmental charities to increase philanthropic investment?  Will individuals upgrading their homes and taking advantage of the incentives donate old, but working items to charity?

Reductions in the economic costs of charitable giving provide substantial incentives for some to give. However, for many, the primary motivation for charitable giving during life and at death are not the deductions, but because that individual finds the cause compelling, a reflection of their values, and wants to make a statement about the kind of person they want to be remembered as being: generous.

[1] www.taxpolicycenter.org/briefing-book/how-did-tcja-affect-incentives-charitable-giving

[2] www.philanthropyroundtable.org/giving-usa-report-shows-2021-charitable-giving-strong-but-did-not-keep-pace-with-inflation

[3] www.philanthropyroundtable.org/inflation-reduction-act-needs-fix-to-protect-tax-free-carried-interest-donation/ 

[4] www.pbmares.com/insights-tax-inflation-reduction-act-impact-on-tax-strategies

[5] blogs.claconnect.com/nonprofitinnovation/inflation-reduction-act-what-the-pending-act-means-for-nonprofits/