Could A Redesigned Tax Deduction Help More People Feel Good About Charitable Giving?

This year’s presidential candidates have proposed hundreds of tax ideas, but largely have been silent on ways to increase tax incentives for charitable giving. Sure, “encouraging charitable giving” isn’t as politically motivating as, say, “taxing wealth” or eliminating billionaires. But the candidates are missing an opportunity to focus attention on ways to enhance tax-motivated giving by tens of millions of households who now take the standard deduction. 

Some give to charities for reasons other than a tax break. We do it because it feels good. But tax incentives do appear to encourage giving and by discouraging taxpayers from itemizing deductions, the Tax Cuts and Jobs Act (TCJA) left nearly 9 of every 10 households without that nudge.

Policymakers could correct this by allowing people to deduct at least some of their charitable gifts of sufficient size, even if the taxpayer doesn’t itemize. This approach could help support the communities and people served by non-profits. It also could help the nonprofit sector, which employs 12.3 million people and spends $1 trillion annually on goods and services. It might even help level our economic and political playing field. 

We have the money to give. But to whom?

Americans did a great job giving to their families and friends this past holiday season. On December 21 alone, the 2019 “Super Saturday” before Christmas, we spent a record $34.4 billion, thanks in large part to an economy that’s enjoying its longest expansion in history. 

When it comes to charitable giving, Americans are relatively generous overall, donating about 2 percent of our income to charities. In 2018 we gave $427.71 billion. But we’re not giving like we used to

Research shows that even before passage of the TCJA, the share of US households that give to charity was falling sharply. The Great Recession of 2008 contributed to a 13 percent drop in the share of households who donated to charity between 2000 and 2016, according to the Indiana University Lily Family School of Philanthropy. That’s about 20 million households per year who stopped giving.

Initial assessments indicate that the TCJA may be accelerating that trend. By increasing the size of the standard deduction and curbing the state and local tax deduction, the TCJA reduced share of itemizers from about 30 percent in 2017 to about 13 percent in 2018. Most of those still itemizing are higher-income households. TPC estimates that only about 9 percent of households will claim a tax deduction for charitable contributions. 

In 2018, the first full year of the TCJA, charitable giving by individuals fell by 3.4 percent, according to Giving USA. United Way—the largest privately funded nonprofit in the world— has seen individual giving decline in six of the last seven quarters. It blames the TCJA, saying it effectively eliminated the tax benefit for middle income givers on their donations and creates a “giving gap” between them and wealthier donors.

Wealthier donors can make larger contributions (by dollar amount) than the rest of us, but they tend to give away a smaller share of their wealth. My TPC colleague Gene Steuerle notes that those with more than $100 million of wealth give away less than half of 1 percent of their assets each year on average. 

What kind of tax incentive might boost charitable giving among the most people? 

At the state level, Vermont allows taxpayers to claim a non-refundable 5 percent tax credit for their first $20,000 in eligible charitable contributions, even if they do not itemize on their federal tax returns. But that idea could be refined by allowing a tax benefit only for those who contribute more than some minimum amount.

In a new chartbook, TPC illustrates the effects of four different tax deductions for charitable contributions that would benefit all tax filers—even non-itemizers. The options would allow a deduction for: all contributions; contributions above 1 percent of Adjusted Gross Income (AGI); contributions above 1.65 percent of AGI; or contributions above 2 percent of AGI. The basic idea: Allow all filers to claim a deduction, but only for gifts above a specified minimum amount. 

The results are noteworthy, and would fit especially well for presidential candidate who want make sure the tax code does not disproportionately benefit the wealthy. 

Today, middle-income households receive less than 2 percent of the benefit of the charitable deduction, while the highest-income 1 percent, those making more than about $750,000 per year, receive nearly 60 percent. Those making more than $3.3 million per year get more than one-third of the tax benefits of charitable giving.   

What if any tax filer could deduct charitable contributions that exceed 1 percent of AGI? The benefits of the tax incentive would shift to lower and middle-income taxpayers and no longer be concentrated among the ultra-wealthy. And taxpayers would receive a nudge about the expected level of charitable donations (e.g., at least 1 percent of AGI).

Nearly one-third of tax filers would receive the benefit, more than three times the share today. And about 44 percent of middle-income households would claim a charitable deduction, up from 6 percent today. By contrast, among the top 1 percent, the share of filers claiming a deduction would fall by more than half, to about 42 percent.  

I like the idea of a tax incentive that encourages people to  give even more to charity, like a universal tax deduction for those who donate more than a specified share of adjusted gross income. It would not likely discourage anybody from giving, and might even encourage those who can give the most to contribute more. The rest of us would receive a tax reward for our generosity… which could mean, for some, more money to give. 

And more reason to feel good.

The Tax Hound, publishing once a month, helps make sense of tax policy for those outside the tax world by connecting tax issues to everyday concerns. Have a question or an idea? Send Renu an email.