Charitable Giving and Taxes

I’ve spent a lot of time lately thinking about our tax code in the United States and how it influences charitable giving. The main reason I’ve been paying more attention to this area of policy is because I was given the incredible opportunity to teach an experiential learning course here at Notre Dame this past fall. The students are given the responsibility of awarding actual grant dollars to local nonprofits. Suffice it to say, their dedication and hard work is beyond inspiring. These students are future leaders. I know they will be model citizens by working and volunteering at nonprofit organizations, and by giving financially throughout their lives.

Yet, I fear that our tax code in its current state is not encouraging charitable giving and that it promotes certain types of giving over others. I especially fear that it dissuades young people from giving, which means giving is not part of their personal finance plans and is not truly considered until much later in life.

The signature aspect of the Tax Cuts and Jobs Act of 2017 was that it nearly doubled the standard deduction. The consequence has been a drastic decline in the number of tax filers that itemize from about 30% to 13%. On its face, I think that is a positive outcome. The less burdensome tax filing is for more Americans, the better. However, the charitable gift deduction was and still is a below the line tax deduction. That’s problematic because tax filers taking the standard deduction and not itemizing receive zero tax benefit by making charitable gifts to 501(c)3 organizations. My tax law professor in law school once said that the tax code, at the end of the day, is social engineering. I think he’s right. The code incents me to withhold pretax dollars and contribute to a 401(k) or 403(b). It’s a signal from the government that retirement savings is important. Rightfully, retirement saving is an above the line deduction. The problem with doubling the standard deduction and keeping the charitable gift deduction below the line is that it signals to taxpayers that charitable giving is important, but only important for taxpayers who itemize.  And which taxpayers generally itemize? Often times, wealthier Americans and/or filers with mortgage interest payments large enough to make itemizing the best decision. That’s an awful way to encourage and promote charitable giving.

Senator Mike Lee (R-UT) released a report in November that suggested we change our charitable gift deduction and make it more universal. The easiest solution is probably to move the charitable gift deduction above the line. The other consequence of this current policy is that it tends to favor charitable giving to secular causes over religious ones. Households with incomes below $200,000 are more likely to direct their charitable dollars to organizations that are religious in nature, or to organizations that directly help those in need. More affluent households are more likely to direct charitable dollars to organizations such as museums and universities. That’s not to say that the charitable giving done by the former group is more commendable. And it’s not to say that the differences in giving among the two groups is as clear cut as the studies might suggest. However, a tax code that offers a tax benefit to some taxpayers, oftentimes wealthier ones, and offers no such benefit to almost 9 in 10 Americans is structurally flawed. I hope that Lee’s report receives more attention and that this policy can change.