Individuals made a record amount of charitable donations in 2019 according to a recent report, despite warnings that changes made by the Tax Cuts and Jobs Act (TJCA) would hinder charitable giving. This has followed a pattern of charitable deductions rising as marginal tax rates fall most likely because individuals have more disposable income. Meanwhile, several bipartisan proposals in Congress would encourage even more charitable giving by expanding the new above-the-deduction for charitable contributions for individuals who claim the standard deduction.
Tax Deductions for Charitable Contributions
An individual may claim an itemized deduction for contributions to a qualified charitable organization on Schedule A (Form 1040 or Form 1040-SR). The deduction is limited to a percentage of the taxpayer’s adjusted gross income (AGI) (the contribution base). This percentage depends on the type of organization receiving the donation and the type of property donated. Any excess for the tax year may be carried forward for five years.
Most people expected the amount of charitable contributions to decrease over the past few years. The reason was that the TJCA nearly doubled the standard deduction beginning in 2018. It was assumed this would reduce charitable contributions as it would reduce the number of individuals who could claim an itemized deduction for their donations.
Charitable Contributions Rise on Falling Tax Rates
A recent report, however, indicates that there has been little reduction in charitable contributions by individuals despite the TJCA change. In fact, the amount of these contributions in nominal terms was possibly a record in 2019 according to Giving USA. Charitable contributions by individuals did fall slightly in 2018 compared to 2017, but that may simply be because individuals bunched their donations in 2017 before the TJCA went into effect.
Higher Tax Rates Effectively Subsidize Donations
So why didn’t charitable contributions fall? According to the Tax Foundation, charitable contributions may be more inversely related to tax rate changes than to the deduction itself. Some individuals are obviously motivated by the deduction but the data shows that when rates fall charitable deductions rise despite losing value.
The TJCA reduced the overall tax rates for individuals, in addition to doubling the standard deduction and effectively reducing the number of taxpayers who itemize. Thus, the rise in charitable contributions indicates that most individuals donate when they have more after-tax income. This is especially true for individuals in the top income tax bracket. They also tend to donate more when the overall economy is strong. This could mean that charitable contributions will fall again in 2020 as the fallout from COVID-19 continues to negatively impact the economy.
Above-the-Line Charitable Deduction for Non-Itemizers
To encourage individuals to give more during the COVID-19 pandemic, Congress provided an incentive to non-itemizers to make charitable contributions. For 2020 only, an individual may claim an “above-the-line” deduction for up to $300 in charitable donations. The legislation is unclear, but most observers assumes that the dollar limitation is $600 for married individuals filing jointly.
To take the deduction:
- The individual must claim the standard deduction rather than itemizing.
- The donation must be made in cash.
- The donation cannot be made to a supporting organization under Code Sec. 509(a)(3) or donor advised fund.
- The deduction cannot include any carryover of charitable contributions from previous tax years.
Proposed Expansion of Charitable Deduction for Non-Itemizers
A bipartisan effort in Congress seeks to expand the current above-the-line deduction for charitable contributions even more. The Universal Giving Pandemic Act would allow an individual to claim an above-the-deduction in 2019 and 2020 of up to one-third of their standard deduction amount as a charitable contribution.
For example, the maximum deduction for 2020 would be:
- $4,133 if single or married filing separately,
- $6,217 if head of household, and
- $8,267 if married filing jointly.
The legislation has been proposed several times, including earlier this year, but Congress has never voted on it. However, as the COVID-19 pandemic and economic fallout continue, the sponsors of the legislation see the expansion of the deduction to help during the crisis.
In a press release, Senator James Lankford (R-OK), one of the primary sponsors of the legislation stated that “[n]onprofits uphold Americans in our times of greatest need… Our families need strong nonprofits to meet their essential needs. They are the private safety net before the public safety net … This proposal incentivizes additional giving during a time of crisis in our nation. I am proud of the incredible work our bipartisan group of senators has done to help ease the federal tax burden for those who give to charities.”
By John Buchanan.