BDQ #4: Why Is There a Charitable Deduction and How Does It Work?

The income tax charitable deduction has been around since 1917, just four years after the 16th Amendment created the modern Federal Income Tax. But why are charitable contributions deductible? And, can a donor actually save money by making a charitable contribution? First, let’s review the history of the income tax, then we’ll explore how the charitable deduction works in practice. The Federal Income Tax The Constitution limited the ability of Congress to impose taxes by requiring that “direct taxes” be levied in proportion to each State’s population. Direct taxes are those, such as the income tax, that apply directly to persons or property. However, there was no limitation on indirect taxes, those that apply to an event including duties and tariffs. As a result, during our nation’s first century, tariffs were the largest source of Federal revenue.

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.

Money Goes to Money: Investment Results for 2021

It is a bit of a paradox that while Americans were battling the second year of an historic pandemic in 2021, the stock market was booming, and the economy was roaring back to life. Certainly, demand for goods and services was exploding, as vaccines rolled out and millions returned to work. Unfortunately, however, with multiple waves and variants of COVID-19, the numbers of cases and hospitalizations shot back up to levels not even seen in 2020. Eventually, those numbers went down – only to rise again, in time, and reach even higher levels. And yet, despite a constant stream of supply chain disruptions, despite monumental labor shortages, and against a backdrop of hundreds of thousands of deaths, the U.S. economy managed to bounce back.

IRS Announces Indexed Tax Items for 2022

The IRS has announced the values for 2022 of various tax items that are indexed annually for inflation. In general, values have been adjusted upward about 3.0%. Of particular interest to gift planners, the unified gift and estate tax exemption amount will be $12,060,000 ($24,120,000 per couple) in 2022, an increase from $11,700,000 ($23,400,000 per couple). For the first time since 2018, the annual gift tax exclusion will also increase, from $15,000 per person this year to $16,000 per person next year. Also of interest, the standard deduction in 2022 will increase to $25,900 for married couples filing jointly and to $12,950 for single filers, an increase of $800 and $400, respectively. Taxpayers who are 65 or older will qualify for an additional $1,400 in standard deduction on top of that (an additional $1,750 if single and not a surviving spouse). See Revenue Procedure 2021-45 (https://www.irs.gov/pub/irs-drop/rp-20-45.pdf) for complete details, including all federal income tax...