The nonprofit sector is trying to seize an opportunity presented in the coronavirus pandemic by making permanent a charitable giving tax break that Congress enacted as a temporary emergency response measure.
“We support permanent inclusion of the Universal Charitable Deduction without giving caps in the tax code,” the Red Cross said in a statement to the Washington Examiner, referring to the deduction for charitable giving that Congress created in the March CARES Act. The deduction, which applies for the 2020 tax year, is called “universal” because all taxpayers can claim it, not just those who itemize deductions, and it’s capped at $300.
The Coastal Community Foundation, which provides services, such as disaster relief, to nine counties along South Carolina’s coast, said the current deduction “doesn’t go quite as far as” it wanted, and the organization has called on Congress to remove or increase the cap and make the provision permanent.
The Charitable Giving Coalition, which represents hundreds of nonprofit groups, has also urged lawmakers to increase the $300 cap and extend the deduction beyond 2020.
The nonprofit sector has fought for years to broaden the tax break to filers who don’t itemize their tax deductions by allowing them to claim an “above-the-line” deduction for their donations. That effort went into overdrive after the 2017 tax overhaul bill increased the standard deduction, which made the charitable-giving tax deduction less attractive as tax filers no longer had to make donations to lower their tax bills.
The nonprofit sector argues that the changes will reduce charitable giving and seek to make the deduction permanent.
“Along with several of our partners in the non-profit sector, we believe that tax policy does have an impact on charitable giving,” the Red Cross stated.
The organization might have a point. In 2017, before tax reform was enacted, over 33 million tax filers claimed the charitable deduction, according to the IRS. That number fell to roughly 12 million for the 2018 tax year after the tax law was in effect.
But tax experts such as Mark Mazur, director at the Tax Policy Center and former assistant secretary for tax policy at the Treasury Department during the Obama administration, said the provision is flawed because it likely won’t increase donations.
“It doesn’t affect people’s decision-making on the margins essentially, so people are getting a deduction of $300 who would have given to charity anyway,” he told the Washington Examiner.
The impetus behind essentially every tax incentive is to promote a certain action that the federal government supports. For charitable giving, the tax break should encourage more giving than a person would have done without claiming the deduction, Mazur argued.
“That’s really the trade-off that we’re looking for,” Mazur said.
But expectations are low that it will increase donations, according to analysis by the Tax Policy Center. Its April 8 report deemed the measure to be a “little more than a gift to anyone who claims the standard deduction.”
The IRS will also have a hard time confirming if the donations are legitimate, according to Garrett Watson, a senior policy analyst at the Tax Foundation.
“The challenge with the current $300 above-the-line deduction is that it is difficult for the IRS to monitor whether those deductions are taken properly given how small the deduction is and the lack of 3rd party reporting,” he said via email.
House Ways and Means Chairman Richard Neal, a Massachusetts Democrat and Congress’s chief tax writer, is taking a wait-and-see approach on support for extending it. He wants to make sure that it actually works as intended and boosts donations, his staff said on Monday.
“We’ll be paying close attention to see if the $300 above-the-line deduction affects the levels of charitable giving and if it has an impact in 2020. What we learn could inform future legislation,” a committee spokesperson told the Washington Examiner via email.
Meanwhile, there is a bipartisan effort in the Senate to expand it.
Republican Sen. James Lankford from Oklahoma and Democratic Sen. Jeanne Shaheen from New Hampshire advocated for a larger deduction during a June 9 Joint Economic Committee hearing.
Their provision increases the $300 above-the-line deduction for charitable giving to one-third of the standard deduction, or up to $4,000 for an individual and $8,000 for joint filers, according to Shaheen’s website.
Mazur said it is unclear if increasing the cap would improve the efficiency of the provision.
“The question is how efficient of an incentive is it, and we don’t have a whole lot of data on this,” he said.
Howard Gleckman, a senior fellow at the Tax Policy Center, said the proposal probably wouldn’t stimulate donations because taxpayers claiming $4,000 or $8,000 deductions most likely already itemize their tax returns and would have little use for the above-the-line deduction.
“Big givers (couples who donate $8000) almost certainly are already itemizing so this won’t benefit them,” he said via email.
However, at least one report shows that donations will increase from the change proposed by the senators.
A 2019 study from Indiana University Lilly Family School of Philanthropy projects that expanding non-itemized deductions for charitable giving would be a boon for nonprofit organizations but a bust for the federal government.
It states that increasing the cap on charitable deductions for non-itemizers such as the Lankford-Shaheen proposal would increase charitable giving by $17.4 billion, but reduce Treasury revenue by up to $19.9 billion. This means the “cost” to the federal government would be larger than the benefit provided.
