Tax Law to Cost Charities $5.7 Billion. What to Do Now.

When the universal charitable tax deduction passed in last year’s sweeping legislation, it was hailed as a win for charities. It was expected to encourage giving by the 90 percent of tax filers who do not itemize and could not deduct their charitable gifts under the old rules.

Under the new tax law, more donors are expected to make charitable contributions; however, new research estimates a net loss in charitable giving of $5.7 billion annually. 

Conducted by the Lilly Family School of Philanthropy at Indiana University and CCS Fundraising, the research focuses on two anticipated effects of the tax law: an annual loss of billions from donors who itemize their taxes and an influx of 8 million small-dollar donors lured back to charitable giving by the tax breaks.

Greg Hagin, managing partner at CCS Fundraising, says he is “more encouraged than not by aspects of this report,” but the data indicates that fundraisers may need to rethink strategies for approaching big donors while simultaneously courting new donors. 

Donors vs. Dollars

The research report explains the disparate effects of the new tax law. Sections of the law aimed at itemizers and at corporate donors are expected to reduce giving annually by $8.53 billion and $1.55 billion, respectively. Meanwhile, the new deduction for non-itemizers is expected to generate $4.39 billion for charities. Taken together, these shifts would result in a net loss for charities.  

As Jon Bergdoll, interim director of data and research partnerships at the Lily Family School, explains, “We’re not anticipating people who aren’t donating already to start donating $1,000; that’s not super likely.” Even though more people will be giving, it will mostly be at that low-dollar level.

Projections for growth in giving by non-itemizers is lower in this report than some other earlier estimates. For example, Capital Policy Analytics suggested a smaller tax break than was enacted would generate $11 billion in additional giving. 

This latest estimate of the tax law’s impact is based in part on two data sets: the Philanthropy Panel Study, a longitudinal data set that studies the same families over many years and how their giving changes, as well as the Survey of Consumer Finances. Those data sets indicate most of the money given by non-itemizers comes from a small subset (15 percent) who already donate more than $1,000 individually or $2,000 as married couples and are unlikely to change their behavior significantly due to the new law.

However, the research report notes that the other 85 percent are likely to respond to the new incentive. But their response is not expected to account for huge gains because they are likely to give at lower levels.

One area that does make a big difference, Bergdoll notes, is the provision that limits deductions by itemizers to 35 percent of the value of their gift, even though the top tax bracket is 37 percent. In other words, 2 percent of their gift is not eligible for a deduction if the donor is in the top bracket. 

“High net worth households tend to be pretty reactive to these things,” Bergdoll says. “We have found in the past, it increases the difficulty probably of getting the same amount from those households as usual.”

What Fundraisers Can Do

The new tax law affects donors differently, depending on their tax status, which nonprofits don’t know, says Laura MacDonald, president of the Benefactor Group, a fundraising consultancy. MacDonald suggests focusing on those who are giving just below the thresholds in the new bill — $1,000 for single filers and $2,000 for married filing jointly — and inform them of the tax changes. 

For example, she suggests looking at individuals who give about $500 or $750 to your organization and try to find ways to encourage them to give $1,000. Similarly, if a gift of $1,500 is coming from a couple, look for ways to encourage them to move to $2,000. However, MacDonald advises against making donors do math. Instead, she suggests,“perhaps have an illustration that for each dollar you give, you will receive a tax deduction of between X and Y. So you can give even more. It’s not the reason people will give, but it will affect the timing and magnitude of their gift.”

She adds that reaching these new donors will take a dedicated plan, because nonprofits that have become reliant on big gifts, “cannot simply turn on a spigot of everyday donors and expect it to produce immediately or to replace the amount that could be lost from the large donors.

Hagin at CCS Fundraising views the potential influx of donors as an opportunity for fundraisers to reverse the long-time trend of losing donors. He encourages nonprofits to focus on segmenting donors into groups, ensuring your donor management systems are effective and up to date, and using AI to provide more personalized communications  that will help retain new donors.

When it comes to high-earning donors turned off by the tax disincentives, Hagin and MacDonald suggest reaching out to major donors to discuss how the changes may affect their giving. For example, because the new tax law requires itemizers to reach a certain threshold before they receive a deduction, some donors may choose to bunch — or give two years worth of gifts in one calendar year — so they can get their full tax benefit. 

“I think that it will demand more of major gift officers,” MacDonald says of the new tax law. “Because it will be less about asking, although asking is still important, and more about helping donors navigate the complexities of giving platforms, tax consequences.”

MacDonald recommends doing scenario planning to address this possibility. She suggests asking questions such as, “What happens if these donors begin to alternate years, making a gift that’s two times their typical gift, but they give it every other year. How are we going to manage that in our cash flow?” And then tell your board about it, so they understand that they may need to rethink how they’re budgeting for this year or the next.

For donors who give via donor-advised funds, there may not be much change.

Many people aren’t keeping up with the tax law changes and may not know about the benefits or nonbeneficial things happening until they file their taxes in 2027, Hagin notes.

“It’s unclear how much specific donor behavior the law might actually change in 2026,” he says. “These net effects will play out over years.”