Options for Changing the Tax Treatment of Charitable Giving
A recent Congressional Budget Office (CBO) report has investigated how changing the structure of tax incentives for individuals' giving under the Code Sec. 170 charitable contribution deduction would affect the tax subsidy (the cost in forgone revenues to the federal government), the overall level of charitable giving, and the extent to which different income groups benefit from the tax preference.
Observation: The CBO analysis used data for 2006, the most recent year for which IRS's sample of individual income tax returns was available. CBO noted that the tax treatment of charitable contributions is generally the same today as it was in 2006. However, because of rising incomes and contribution amounts, the options that it examines that might include a fixed dollar floor would have a somewhat different impact today.
Background. For individuals, charitable contributions are deductible only as an itemized deduction on Schedule A (Form 1040). An individual can deduct charitable contributions up to 50%, 30% or 20% of his adjusted gross income, depending on the type of property contributed and the type of donee. A corporation generally can deduct charitable contributions up to 10% of its taxable income. Amounts that exceed the ceilings can be carried forward for five years. The deduction allowed for property contributions is usually the property's fair market value, but the deduction is reduced for gifts of certain types of property. (Code Sec. 170, Reg. §1.170A-1(a))
According to the Joint Committee on Taxation (JCS-3-10, Dec.15, 2010), the cost of the charitable contribution deduction at current levels of charitable giving—measured as the additional revenues that could be collected if the deduction was eliminated—will total about $230 billion between 2010 and 2014.
CBO looks at charitable giving. In its analysis, CBO examined how changing the structure of tax incentives for giving would affect the tax subsidy, the overall level of charitable giving, and the extent to which different income groups benefit from the tax preference. Specifically, CBO looked at several options for altering the current income tax treatment of charitable giving. For each of the four categories, CBO analyzed two potential floors: a fixed dollar amount ($500 for single taxpayers and $1,000 for couples filing a joint return) and a percentage of income (2% of AGI). Only contributions in excess of the floor would be deductible or eligible for a credit.
The options could be grouped into these four categories:
Retaining the current deduction for itemizers but adding a floor;
Allowing all taxpayers to claim the deduction, with or without a floor;
Replacing the deduction with a nonrefundable credit for all taxpayers, equal to 25% of a taxpayer's charitable donations, with or without a floor; and
Replacing the deduction with a nonrefundable credit for all taxpayers, equal to 15% of a taxpayer's charitable donations, with or without a floor.
CBO's conclusions. In its report, CBO concluded that adding a contribution floor to any of the approaches listed above would reduce both the total federal tax subsidy and the total amount donated to charity, relative to the same option without a floor. The reduction in the subsidy would exceed the reduction in charitable contributions, whether measured in dollars or as a percentage change. That's because even with a floor, there would be a tax incentive for additional giving above the level of the floor, and the tax subsidy would still be reduced by donations that people might have made even without a tax incentive.
Allowing all taxpayers to claim a deduction for charitable giving would have increased donations in 2006 by an estimated $2.0 billion (1%) and increased the total tax subsidy by $5.2 billion (13%) from the 2006 amounts. However, a deduction for all taxpayers combined with a floor could both increase donations and decrease the tax subsidy. For example, a deduction combined with a fixed dollar floor of $500/$1,000 would have increased donations by $800 million in 2006 and decreased the tax subsidy by $2.5 billion.
The CBO report concluded if the current deduction was replaced with a 25% tax credit, both donations and the government's forgone revenues would increase. However, if the credit was combined with certain contribution floors, donations could increase while the tax subsidy was reduced, or donations could decrease by a small percentage while the tax subsidy was reduced by a large percentage. For example, setting the credit at 15% would reduce donations, but would reduce the tax subsidy by a larger amount (both in dollars and as a percentage change).
Effects on taxpayers. The CBO report determined that changing the tax treatment of charitable contributions would have differing effects on taxpayers at different points on the income scale. Adding a contribution floor to the current deduction for itemizers would reduce tax subsidies for all income groups, but the size of the reduction for high-income taxpayers would vary significantly depending on the type of floor used. For example, adding a fixed dollar floor of $500/$1,000 in 2006 would have lowered the tax subsidy for people with AGI over $100,000 by 0.08% of their AGI, but adding a floor equal to 2% of AGI would have lowered the tax subsidy for that income group by 0.30% of their AGI.
If the charitable contribution deduction was available to nonitemizers, lower- and middle-income taxpayers would benefit. Such taxpayers tend not to itemize deductions because their deductible expenses (e.g., mortgage interest and state and local taxes, as well as charitable donations) aren't large enough to exceed the standard deduction. These groups would benefit even more if the current deduction was replaced with a nonrefundable credit that gave all income groups the same tax incentives for giving. For example, if the deduction was replaced with a 25% credit in 2006, the tax subsidy for taxpayers with AGI below $100,000 would have increased by 0.27% of their AGI, but the tax subsidy would have decreased for people above that income level by 0.09% of AGI. Tax subsidies would be lower for all income groups with a 15% credit than with a 25% credit.
References: For charitable contribution deductions, see FTC 2d/FIN ¶A-2701; United States Tax Reporter ¶1704.01; TaxDesk ¶330,201; TG ¶18951.