A Deduction for Non-Itemizers? Not so fast.
Non-itemizers would be able to take advantage of an expanded charitable deduction under a bill introduced by Senator James Lankford (R-OK). “The Charitable Act” (S.566) would permit those who elect the Standard Deduction to claim an additional charitable deduction up to one-third of the Standard Deduction amount for two years only, 2023 and 2024. This year, one-third of the Standard Deduction for a married couple filing jointly is a little over $9,200. It is half that for a single filer. The Bill, which has ten bipartisan co-sponsors, has been referred to the Senate Finance Committee. There is no companion legislation in the House of Representatives.
The proposed Charitable Act has generated excitement in the charitable sector but, before popping the champagne corks, it is important to consider political realities. The Congressional Budget Office has yet to score the cost of The Charitable Act, but the lost tax revenue is certainly to be tens of billions, perhaps more. Congress will need to be convinced that the projected results of enacting the proposed legislation will justify its cost. Unfortunately, recent experience indicates it is unclear that allowing non-itemizers a charitable deduction increases charitable giving. The temporary provisions allowing a $300 charitable deduction for non-itemizers in 2020 and 2021 were not accompanied by significant increases in individual giving. Given the disruptions caused by the pandemic during that period, it is possible individual giving would have been significantly lower without the $300 deduction for non-itemizers, but we just don’t know.
From a broader political perspective, the charitable giving sector should be wary of growing threats to the charitable deduction itself. A Congressional Budget Office study in 2011 labeled the charitable deduction as a “tax subsidy” that costs the Treasury $40.9 billion per year ($61.7 billion in 2023) and disproportionately benefits charitable organizations favored by the wealthy.
A report to the Joint Committee on Taxation last year raised a number of questions about the basic justification for the charitable deduction concluding, in part:
“On the other hand, if donors find charitable giving gratifying because they enjoy making someone else happy, they feel relief from the guilt of not giving, or they enjoy the recognition that accompanies donations, then they are said to experience a “warm-glow” from giving, and donors can be said to benefit from their gifts. In this case, the donation is, at least in part, a personal expenditure, and a deduction for the full amount of the donation should not be allowed under a comprehensive income tax system.”
Tax incentives for charitable giving have long been a part of our tax system. Tax incentives for charitable giving are not merely a giveaway to those who choose to make charitable contributions. Charitable gift planners must be prepared to make the case that the charitable deduction encourages more giving, thereby benefitting people who rely on the services provided by the charitable sector.