Tax Reform and Charities

Charities stand to lose billions in donations if Republicans advance their tax overhaul, prompting the nonprofits to carefully attempt to persuade lawmakers to reshape their plan.

As a result of a proposal to double the standard deduction and prevent people from deducting state and local taxes from federal taxable income, fewer taxpayers—5% instead of 30%—would have a financial incentive to itemize their deductions, including their charitable gifts, according to several estimates.

Especially estimates by charity associations, who also have a vested interest in claiming that, with no deduction incentive, Americans won’t donate to charity as much as we do presently.  Americans, though, at least the vast majority who do donate to charity, do so because it’s a right thing to do, not because we get a tax deduction for the donation.  That last simply makes no financial sense. Say a donor is in the 39.6% bracket.  If he makes a $1,000 donation, he’ll get a deduction of $396.  His donation still will cost him $604: he’s lost money on the donation/deduction exchange.  The cost to the donor increases as we go down the brackets.  American taxpayers aren’t stupid.

When we put a charitable contribution and its deductiblilty in the context of the rest of the deductions, we see even further the foolishness of the concern.

For example, a married couple with costs of $7,000 in mortgage interest and $6,000 in local taxes would exceed today’s $12,700 standard deduction. That couple would have an incentive to itemize and deduct every dollar of charitable contributions.

The totality of deductions must exceed a threshold before the deductions can be taken, and then only the amount exceeding the threshold can be deducted—all of them together.  Thus, a charitable deduction in combination with a mortgage deduction gets the deduction spread across both costs together—driving the cost of the charitable donation even closer to the amount actually donated.

American taxpayers aren’t stupid.

David Wills, President Emeritus of the National Christian Foundation has a different take.

We don’t think that anybody should have their charitable giving taxed. Anybody[.]

Leaving aside the illegitimacy of using our tax code for social engineering, the tax on a charitable donation would become pretty unimportant to the donor under any serious tax code reform, including the present one that’s on offer.

American taxpayers aren’t cheap, either.

In short, I’m not convinced charities will suffer overmuch with a combination of lower tax rates and elimination of the charitable tax deduction (among other deductions also being eliminated)—especially given the doubled standard deduction that’s in the current proposal.  With more money in our pockets instead of Uncle Sugar’s, Americans will be freer to donate.

We Americans are neither stupid nor cheap.

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