The Math behind the Cost of Donating

Back to the article – Tax and the Church: Will the New Tax Law Affect Stewardship?

For 2017, the highest marginal tax is 39.6 percent. Any money that a family makes over $470,700 (married filing jointly) will be taxed at that rate. A $1,000 charitable donation will reduce their taxable income, providing a $396 dollar tax reduction. At the new top rate of 37 percent, the deduction much lower: only $370.

Taking into account the deduction, a $1,000 donation actually cost the donor only $604 under the old rate ($1,000 less the $396 deduction). Under the new rate, the same donation will cost more: $630. Perhaps the $24 difference seems minimal, but there is a potentially greater impact.

Imagine that a donor is willing to give whatever amount would cost them $1,000 net of taxes. At the old rate, the donation would be $1,655. However, the new rate would see a donation of $1,587 – a $68 difference.

And because not only are the rates changing, but also the tax brackets, many top donors will experience a rate drop even lower, to 35 percent, resulting in a $1,538 donation at that same $1,000 net cost. That’s a $117 loss.

“My members are not top earners,” you might say. However, the same principle applies to middle-income donors. A drop from 28 to 24 percent will result in a $73 loss of donation. And while we may hope that donors would direct their tax savings to the church, history teaches otherwise.

According to a study by Indiana University, decreasing the top marginal rate could reduce charitable giving by 0.8%. While this pales in comparison to the changes in the standard deduction (below), most charities and faith communities would feel the pinch of such a reduction.

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