In 2020, individual charitable giving by Americans reached $324 billion, a record high and a 2.2% increase from 2019. As the pandemic imposed significant costs on our society, many households shared their resources with others, including religious, educational and social service organizations. . For many reasons, giving is a good thing and our society is better for it. Encouraging people to give is also a good and laudable goal, if done well. Unfortunately, lawmakers are currently seeking a tax incentive for charitable donations that is poorly targeted.
In 2020 and 2021, as part of its response to the COVID-19 pandemic, the federal government allowed a capped upper deduction for non-detailed taxpayers for charitable donations of up to $300 in 2020 and $300 for single filers and $600 for married couples in 2021. Generally, only taxpayers who itemize their deductions can claim charitable contributions, but this policy covered donations from all taxpayers. Now, Senate tax writers from both parties are seeking to reinstate that expired provision.
Although well-intentioned, the temporary deduction for charitable donations above the line is an imprudent tax policy. This is a windfall gain for all taxpayers who would make contributions of $300 (or $600) in the absence of the deduction, and there is no incentive to give more beyond these very low thresholds. . According to the Joint Committee on Taxation, these policies cost $2.9 billion for 2021. A well-designed policy would encourage more households to give and incentivize increased contributions from those who are already giving. Fortunately, this better policy requires only one simple change to the current proposal: a deduction above the no-cap line.
To understand why, consider how current tax policy relates to charitable donations. Under current law, taxpayers who itemize are allowed to deduct charitable contributions from their taxable income (subject to certain limitations). An additional dollar of charitable donations reduces taxable income by $1 and saves the taxpayer an amount equal to their marginal tax rate. So those in the 24% tax bracket can donate an extra dollar to their favorite charity while paying only 76 cents after tax. For taxpayers claiming the standard deduction, the price of giving $1 is $1.
A key change in the Tax Cuts and Jobs Act (TCJA) of 2017 was the increase in the standard deduction amount. For married taxpayers filing jointly, the standard deduction in 2022 is $25,900. Before 2018, it was $12,700. As a result, the share of taxpayers who itemize their deductions – thus benefiting from an incentive for charitable donations – fell from 31% to 11%, and charitable donations fell by $15.5 billion in 2018 compared to at their level predicted by the TCJA.
An uncapped higher deduction for charitable donations would create an incentive to give for all taxpayers and increase total charitable donations by $21.5 billion. Unfortunately, the cost of this policy probably exceeds the expected increase in donations.
If the policy instead had a floor, meaning the deduction is only available on donations that exceed a minimum amount, it would significantly reduce the budget cost with only minimal impact on increasing overall donations. A floor set at an average donation level or a percentage of adjusted gross income would effectively encourage Additional giving above what would have happened anyway. For example, a floor of $500 for single filers and $1,000 for married filers would increase donations by $19.1 billion and cost about $14.6 billion. The cost could, if desired, be offset by a reduction in the standard deduction.
As lawmakers consider making charitable tax benefits available to all taxpayers, they should focus on designing policies that effectively increase charitable contributions, not pay lip service.