Businesses and individuals are responding by donating school supplies, masks, and meals. These responses of compassion aren’t just from the wealthiest among us but from average Americans who care about their neighbors.
Though giving to charitable work has many benefits, one benefit remains elusive to most donors — tax deductions.
When you file your federal income taxes, you can either itemize expenses (including charitable giving) or take the standard deduction. Typically, the greater of these amounts is used to reduce how much of your income the federal government can tax. Filers who take the standard deduction don’t get a tax benefit for donating to charity.
Prior to President Trump’s tax reform — the Tax Cuts and Jobs Act (TCJA) — in 2017, about 31 percent of filers itemized deductions on their federal income taxes. Almost half of these itemizers had an adjusted gross income (AGI) of $100,000 or more, even though that income group accounts for just 18 percent of all tax returns.
The TCJA made several changes that affected charitable giving. One significant provision doubled the standard deduction, which caused the total number of itemizing returns to drop to about 11 percent in 2018, 58 percent of which have an AGI over $100,000. In my research with Dr. Jonathan Meer at Texas A&M University, we estimated that the TCJA roughly led to a $9.8 billion (3.5 percent) decrease in individual charitable giving in the U.S. in 2018.
But low- and middle-income households — now even less likely to get a tax benefit from giving — are significant donors.
In another paper, Dr. Meer and I show that the average household making around $45,000 per year gives about 1.6 percent of their income, roughly the same proportion as households making $400,000 who are more than three times as likely to include donations on their tax returns.
To be sure, there are many reasons beyond tax benefits why people should — and do — donate to charity. But charitable activity is an important aspect of civil society, exemplified by the deduction’s persistence in our tax code. If the donations of modest-means people benefit society in some way, then they should also be able to receive the tax benefits — that shouldn’t accrue primarily to the top 20 percent just because they already have bigger mortgages and pay more in state taxes.
Every year since 2017, there has been a bill introduced in Congress that would create some form of a universal charitable deduction (UCD) that opens up tax benefits to nonitemizers. Yet these bills never gain traction.
The CARES Act passed in March implemented an extremely weak version of this: Those taking the standard deduction for tax year 2020 could also deduct up to $300 of donations made. But as I and others have noted, this is unlikely to benefit nonprofits much because the amount is too small to significantly change donors’ behavior.
In June, there was a bill with bipartisan co-sponsorship that would create a charitable deduction for non-itemizers up to one-third of their standard deduction for contributions made during 2019 and 2020. The bill never made it out of committee, but Sen. Ted Cruz included it as a provision in his RECOVERY Act, changing only the eligible time frame to be 2020 and 2021.
But why stop in 2021? Both presidential candidates have tax plans that will again shift incentives to give. After the election, under either administration, Congress could make some form of a universal charitable deduction a permanent fixture of the tax code.
There are several ways it could be structured to encourage giving to charities and provide tax benefits to modest-income households. Of course, there are always tradeoffs, namely that tax receipts would go down in a time when the federal budget deficit is growing. This means spending cuts or tax expenditure reductions are necessary for a UCD to be deficit-neutral; the former is made somewhat more feasible because many UCD structures would likely generate more in donations to charities than the Treasury would see tax receipts decrease.
Admittedly, enforcement by the IRS would be difficult, and some take issue with what qualifies as a charitable deduction (and rightly so). But these problems can be addressed in the re-designing of a charitable deduction that benefits all Americans — not just the richest among us.