Think about the nonprofit organizations that have made a difference in your life or the lives of those in your community. What if those organizations were no longer able to provide their services, or were forced to operate at a reduced capacity due to lack of funds?

Many Americans are loyal supporters of a variety of charitable organizations, but recent changes in tax legislation have made this less financially beneficial than it was in previous years, putting the donations that nonprofits rely on at risk.

The Tax Cuts and Jobs Act of 2017 nearly doubled the standard deduction, which made it more financially advantageous for many taxpayers not to itemize deductions on their returns. This change dropped the number of Americans who itemize their taxes from 31% to 9% in 2020. In turn, charitable giving by middle- and lower-income taxpayers dropped significantly, leaving fewer Americans with access to the charitable deduction. 

Researchers at Indiana University’s Lilly Family School of Philanthropy and the University of Notre Dame found that in the first year after this tax legislation was enacted, giving dropped by approximately $20 billion. This steep decline in donors and donations threatens the ability of charities and faith-based organizations to provide critical services.

Individual donations make up a majority of annual giving

Why is this important to the charitable sector?

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According to data from the annual Giving USA Report, individual giving makes up the majority of contributions each year, but this percentage is declining. Giving from individuals in 2023 totaled 67% of all philanthropy, compared with 80% in 1984. 

Giving from foundations has increased, particularly in the past 20 years, but in general, when revenue from one source decreases to a nonprofit, it can lead to a reduction in services if other funds are not available to make up the gap. 

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The Tax Cuts and Jobs Act is set to expire at the end of this year, unless Congress takes action to extend the provisions. With a Republican majority in both houses, an extension is likely, meaning nonprofit leaders are hopeful that alongside this extension, lawmakers will consider also reinstating and expanding upon legislation from 2020 that offered a charitable deduction for all taxpayers. 

The Coronavirus Aid, Relief and Economic Security (CARES) Act included a provision through which all taxpayers were allowed to take a charitable deduction of up to $300 in 2020, and up to $300 as individuals or $600 for couples in 2021.

The measure saw an immediate impact, generating $10.9 billion to charities in 2020 from more than 42 million Americans.

This policy solution was found to be especially beneficial for lower-income donors giving small contributions. In fact, about a fifth of Americans taking the $300 deduction in 2021 made less than $30,000 a year. 

Small donations add up for charities in need

Small donations add up, and they also provide a pathway for younger donors to establish a habit of philanthropy early in their lives. As baby boomers begin to transfer wealth to younger generations, building a culture of philanthropy among millennials and Generation Z will be all that much more important for the future of nonprofits and the services they provide to our communities.  

Unfortunately, the CARES Act provision providing this incentive for small donations was allowed to expire at the end of 2021, resulting in a significant dropoff in this giving category. Data from the Association of Fundraising Professionals’ Fundraising Effectiveness Project shows that nonprofits are struggling to recruit and retain donors, with the largest drop being among donors giving $100 or less. 

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With the Tax Cuts and Jobs Act tax policy up for debate this year, groups such as the Charitable Giving Coalition are lending their support to a bipartisan, bicameral bill called the Charitable Act, which if passed would restore the charitable deduction for non-itemizers and raise the cap, ensuring Americans have the freedom to support the nonprofits of their choice and deduct the donation from their federal taxes.

A charitable deduction for the more than 90% of Americans who do not itemize is good tax policy, as it encourages individuals to consider their community’s needs. Recent research from the Philanthropy Roundtable finds that for every $1 the U.S. Treasury forgoes in potential revenues via tax incentives, the result is $1.30 being directed to public charities.

Interested in supporting the Charitable Act? AFP Global has a free tool online that allows anyone to send a message to their members of Congress in support of the charitable deduction for all taxpayers. We encourage anyone involved in nonprofits – staff, volunteers and donors – to take two minutes to make their voice heard.

Lisa Chmiola serves as U.S. government relations chair and incoming vice chair of external relations for AFP Global. A fundraising professional for more than 23 years, she is the assistant vice president of development for Loyola University New Orleans.