Key Issues in Tax Reform: The Charitable Deduction for Individuals

Key Issues in Tax Reform: The Charitable Deduction for Individuals

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Updated November 15, 2017
Key Issues in Tax Reform: The Charitable Deduction for
Individuals
The charitable deduction is a long-standing feature of the
Figure 1. Limitations on Charitable Contributions
individual income tax. It is also one of the largest individual
Valuation
income tax provisions in terms of annual forgone revenue,
Type of
Rules for
an estimated $56.9 billion in 2017. This In Focus provides
Donation
Recipient
Property
Limitation
background information on the charitable deduction for
individual taxpayers and discusses the provision in the
public charity; private
Basis of the
context of tax reform. Tax provisions for corporate
cash or short-
operating foundation; federal,
50% of AGI
property
term capital
state, local government
contributions and charitable bequests are not addressed.
gain property
private non-operating
Basis of the
The Deduction
30% of AGI
foundation; other*
property
Under current law, taxpayers who itemize their deductions
public charity; private
can—subject to certain limitations—deduct charitable
long-term
operating foundation; federal, Fair market value
30% of AGI
donations to qualifying organizations. Qualifying
capital gain
state, local government
property
organizations are generally “public charities” or “private
private non-operating
Basis of the
20% of AGI
foundations,” with tax-exempt status under Internal
foundation; other*
property

Revenue Code (IRC) Section 501(c)(3); federal, state, or
Source: Internal Revenue Code (IRC) Section 170.
local governments; and other less common types of
Notes: These are general rules, and there are numerous exceptions.
qualifying organizations.
*Includes qualifying contributions to veterans’ organizations, fraternal
societies, and nonprofit cemeteries. Not al non-operating
Tax deductible donations to qualifying organizations can be
foundations are subject to the 30% limit.
in the form of cash or property. Property held for more than
one year is often referred to as long-term capital gain
Over time, Congress has modified the maximum amount
property. Property held for less than a year is often referred
that can be deducted in a given year by changing the
to as short-term capital gain property. Depending on (1) the
income limitation. In 1952, as part P.L. 82-465, Congress
type of property donated and (2) the type of qualifying
raised the limitation to 20% of AGI. In 1954, Congress
organization that receives the donations, there are
increased the maximum deduction limit to 30% of AGI
limitations on the total dollar amount that can be deducted
(P.L. 83-591) for donations to certain public charities. The
by the taxpayer in a given tax year. The limitations are
Tax Reform Act of 1969 (P.L. 91-172) raised the deduction
defined as a percentage of the taxpayer’s adjusted gross
limit to 50% of AGI for donations to public charities and
income or AGI (computed without regard to net operating
allowed deductions for contributions to private operating
loss carrybacks), as noted in Figure 1. If the amount
foundations. The 1969 act also imposed a 30% limit for
deducted exceeds the taxpayer’s AGI limitation, the excess
contributions of appreciated property and imposed other
can be carried forward and deducted on future years’ tax
restrictions on contributions of long-term capital gain
returns for up to five years.
property. The Deficit Reduction Act of 1984 (P.L. 98-369)
raised the limitation on the deduction for donations of cash
For non-cash donations, there are rules on how to value the
or short-term capital gain property to private non-operating
property. Depending on the type of property and the
foundations from 20% to 30% of AGI.
recipient organizations, the property is generally valued at
its basis (i.e., what the taxpayer originally paid for the
There were exceptions to these limits for particularly large
property with adjustments) or its fair market value (how
gifts. The Revenue Act of 1924 (P.L. 68-176) specified that
much the taxpayer would receive in an open market for the
if a taxpayer made contributions exceeding 90% of net
property at the time it is donated) as noted in Figure 1.
income in the tax year and each of the past 10 years, a full
deduction was allowed. A phaseout of the unlimited
Selected Legislative Background
deduction was included in the Tax Reform Act of 1969.
The charitable deduction was first enacted to offset the
potential negative effects of increased income taxes on
In the early 1980s, temporary changes provided a charitable
charitable giving as part of the War Income Tax Revenue
deduction to non-itemizers. The Economic Recovery Act of
Act of 1917 (P.L. 65-50). The overall amount that could be
1981 (P.L. 97-34) allowed taxpayers who took the standard
deducted was limited to 15% of net taxable income to
deduction to claim an additional deduction for charitable
prevent taxpayers from eliminating tax liability by claiming
giving. This temporary provision went into effect in 1982,
the deduction. The deduction has been changed dozens of
and was allowed to expire as scheduled at the end of 1986.
times since enactment. Key legislative changes relevant to
this In Focus are highlighted next.
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Key Issues in Tax Reform: The Charitable Deduction for Individuals
Cost
the deduction. Other changes to the deduction might
The charitable deduction is estimated to result in $60.9
include modified AGI limits or changes related to valuation
billion in forgone revenue in FY2017, $56.9 billion from
of non-cash gifts.
the individual income tax and $4.0 billion from the
corporate income tax (see Figure 2). During the past
Figure 3. Distribution of Returns Filed and Charitable
decade, tax expenditures associated with the charitable
Deduction Tax Expenditures, by Income Class
deduction have fluctuated, largely following patterns in
2017
charitable giving. Individual charitable giving fell between
2008 and 2009, as a result of the Great Recession. The post-
recession recovery in giving has increased in recent years,
and is reflected in the tax expenditure estimates.
Figure 2. Charitable Deduction Tax Expenditures
FY2008 – FY2017

Source: Joint Committee on Taxation.
Notes: Calculations use 2017 rates and 2016 income levels.
Changes in tax policy enacted as part of tax reform might
also affect charitable giving incentives indirectly. Since the

tax savings associated with charitable giving is a function
Source: Joint Committee on Taxation.
of the donor’s marginal tax rate, lower marginal tax rates

Distribution of Benefits
reduce the tax incentive to give. Policy changes that reduce
the number of taxpayers itemizing deductions (like
Tax expenditures for charitable deductions largely benefit
increasing the standard deduction), while maintaining the
higher-income taxpayers. Higher-income taxpayers tend to
charitable deduction as an itemized deduction, could reduce
(1) have a greater ability to give; and (2) derive a larger tax
the number of taxpayers with a tax incentive for charitable
benefit from each dollar given since they generally face
contributions.
higher marginal tax rates. An estimated 71% of tax
expenditures for charitable giving in FY2017 will be
Any tax reform is likely to have provisions that will affect
claimed by taxpayers in the $200,000 and above income
the tax incentives for charitable giving, either directly or
class (see Figure 3). Overall, an estimated 6% of returns
indirectly. The Unified Framework for Fixing Our Broken
fall into this class. In contrast, an estimated 8% of the
Tax Code, issued by the Office of the Speaker on
charitable deduction tax expenditures are associated with
September 27, 2017, would retain tax incentives for
tax returns filed in income classes of $100,000 or less (78%
charitable giving in tax reform.
of tax returns filed fall into a $100,000 or less income
class). Additionally, only taxpayers that itemize deductions
Current tax reform legislation—H.R. 1, as reported, and the
can claim a deduction for charitable donations. In 2014,
Senate Finance Committee chairman’s mark—would make
93% of taxpayers with AGI above $200,000 itemized
several changes to the charitable giving deduction. For
deductions, while 20% of taxpayers with AGI of less than
example, both bills would increase the AGI limitation on
$100,000 itemized.
cash contributions from 50% to 60%. In addition, both bills
Considerations for Tax Reform
would repeal the deduction for contributions made to higher
education institutions in exchange for the right to purchase
There tends to be agreement that the tax code should
seating at university athletic events. Both bills would also
support charitable giving. Tax reform, however, could
substantially increase the standard deduction, which would
result in changes to tax incentives for charitable giving.
result in fewer taxpayers claiming itemized deductions such
These changes could be direct. For example, the deduction
as the charitable deduction.
could be modified to allow non-itemizers to receive tax
benefits for donations. Alternatively, a floor could be
Margot L. Crandall-Hollick, Specialist in Public Finance
imposed, restricting deductions for charitable giving to
Molly F. Sherlock, Specialist in Public Finance
giving above some threshold. The deduction could also be
converted to a credit, equalizing the subsidy for giving by
IF10706
individuals in different tax brackets. Another way to
equalize the value of the deduction for taxpayers in
different tax brackets is to cap (or make fixed) the rate of
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Key Issues in Tax Reform: The Charitable Deduction for Individuals

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