As debt hits $22 trillion, our day of fiscal reckoning nears
We should allow all taxpayers to deduct charitable contributions
Americans gave $287 billion to charities in 2017, up 5 percent from 2016, according to a recent estimate by Giving USA. Individual donations help support a vibrant nonprofit sector that reflects the wide range of values and causes supported by the citizens of our diverse society. However, charitable giving will face headwinds from the new tax law in 2018. Under the new law, millions of taxpayers will no longer deduct their charitable contributions on their income tax returns, eroding a tax incentive that has long spurred individual giving. Fortunately, a simple change can restore the charitable deduction for those taxpayers and extend it to many others.
Although the sweeping tax law adopted last December didn't take aim at the charitable deduction, the deduction suffered significant collateral damage. Here's what happened. The charitable deduction is only available to taxpayers who choose to itemize their deductions, not those who choose to take the standard deduction. Changes made by the new law will prompt millions of taxpayers to switch from itemizing to taking the standard deduction, fencing them out of the charitable deduction.
The new tax law nearly doubles the standard deduction. The 2018 standard deduction for married couples, which would have been $13,000 under the old law, is $24,000 under the new law. Consider a married couple with potential itemized deductions, such as charitable contributions, mortgage interest payments, and state and local taxes, of $16,000. The couple would have itemized their deductions under the old law, but they will claim the $24,000 standard deduction under the new law.
That's good news for the couple, because they will deduct an extra $8,000. But it could spell trouble for the charities that they support, because the couple will no longer have a tax incentive to give. Suppose the couple is in the 22 percent tax bracket. If they still itemized their deductions, giving an extra dollar to charity would lower their taxes by 22 cents. They could put an extra dollar in the hands of their favored causes while going out of pocket only 78 cents. Now that they're taking the standard deduction, though, they get no tax savings from giving more. When they give to charity, they have to pay full freight. Because giving is more expensive, the couple is likely to do less of it.
How big is the likely impact? Using the Open Source Policy Center's tax calculator, my American Enterprise Institute colleagues Alex Brill and Derrick Choe estimate that 20 million taxpayers will itemize deductions in 2018, down from 47 million who would have itemized under the old law. Based on previous estimates of how sensitive giving is to tax incentives, Brill and Choe conclude that the bigger standard deduction will reduce charitable giving by $14.2 billion. Other changes made by the new law, primarily lower tax rates, will reduce giving by an additional $3 billion.
To offset the damage, we could try to find a way to again make the charitable deduction available to 47 million taxpayers. But why stop there? To aid the wide variety of nonprofit organizations that Americans choose to support, we should, at a minimum, make the charitable deduction available to everyone who pays individual income tax.
There's a simple way to do that by just changing the charitable write-off from an itemized deduction to an "above the line" deduction available to all taxpayers, including those who take the standard deduction. A number of deductions, including those for retirement account contributions and student loan interest payments, are already above the line. The charitable deduction deserves the same treatment.
Rep. Chris Smith (R-N.H.) and Rep. Henry Cuellar (D-Texas) recently introduced legislation calling for an "above the line" charitable deduction. My colleagues Brill and Choe estimate that moving to an "above the line" deduction would boost charitable giving by $21.5 billion, more than offsetting the impact of the new tax law. Ideally, we should offer even broader and more uniform tax relief for charitable giving.
We could replace the deduction with a tax credit that provides the same percentage tax relief for contributions by people in all tax brackets and we could even pay the credit in cash to people with no individual income tax liability. For now, though, moving to an "above the line" deduction would be a big step forward. The least we should do is let everyone who pays individual income tax deduct their charitable contributions.
Alan D. Viard is a resident scholar at the American Enterprise Institute, where he studies federal tax and budget policy. He previously served as an economist at the Federal Reserve Bank of Dallas, the White House Council of Economic Advisers and the United States Joint Committee on Taxation.