Under current law, taxpayers who itemize deductions can deduct most of their charitable contributions, thereby reducing their tax liability. Most taxpayers give up that charitable incentive, along with other itemized deductions, to take a standard deduction of greater value.

A More Universal Deduction

At present, between 85 and of 90 percent of all taxpayers take the standard deduction and cannot claim a deduction for charitable giving. Even when a greater share of taxpayers itemized, extending the deduction to nonitemizers was often advocated to expand the reach of the charitable deduction.

The 2017 Tax Cuts and Jobs Act (TCJA), however, went in the opposite direction and reduced tax subsidies for charitable giving. It did so through several provisions that substantially increased the share of taxpayers taking a larger standard deduction in lieu of claiming itemizable expenses. Accordingly, there is renewed interest in a more universal deduction (or even credit) that would extend the charitable deduction to taxpayers who do not itemize.

A universal deduction would extend the existing deduction for itemizers to taxpayers claiming the standard deduction. Many proposals, however, would instead allow non-itemizers to claim a separate deduction that would be somewhat less comprehensive than that provided for itemizers. In the latter case, a confusing set of two charitable incentives would be in the law, one for itemizers and one (with different limit) for some other taxpayers. Many taxpayers would need to compare the advantage of itemizing deductions, including one type of charitable deduction, or the standard deduction with a second type of charitable deduction

Extending the deduction to non-itemizers raises two issues: cost-effectiveness and compliance.

First, the portion of any incentive that subsidizes the first dollars of giving is  ineffective because it subsidizes gifts that taxpayers would make with or without a deduction. Consider a taxpayer who would otherwise give away $1,000 and, because of an incentive, increases that giving to $1,200. The money spent on the deduction for the first $1,000 does not subsidize additional giving; the money spent on the last $200 is what provides the incentive to give more. The government cannot observe how much taxpayers would give without an incentive, but setting a low floor almost certainly concentrates the subsidy where it is more effective at increasing giving.

Second, the Internal Revenue Service (IRS) audits very few people and relies heavily on withholding and document matching to monitor most taxpayers’ compliance. But the reporting system for charitable contributions is somewhat weak. IRS research clearly indicates that non-compliance is much larger when weak reporting systems are in place.

Floor on Deductions

If a more universal deduction were combined with a reasonable floor applied to all taxpayers, much or all the revenue loss would be eliminated, as would some of the problems with additional noncompliance and complexity.

Taxpayers, for instance, might be allowed to claim charitable deductions greater than 1 or 2 percent of their adjusted gross income, regardless of whether they itemize. A modest floor would leave in place an incentive for all taxpayers, though they must give more than a modest amount to take advantage of it.

Meanwhile, the subsidy for some of the first dollars of giving would be eliminated for everyone. Almost no matter how sensitive or insensitive taxpayers are to incentives, a revenue-neutral reform that exchanges fewer subsidies for the first dollars of giving in favor of more subsidies for the last dollars of giving would almost inevitably increase giving.

At the same time, such an approach would address some of the concerns about administration and compliance by eliminating the need for IRS to monitor small givers, which it has not been able to do effectively.

A Better Reporting System For Charitable Contributions

Expanding reporting requirements for charitable contributions would raise revenues. Congress occasionally has required increased reporting, as when it required charities to track and send letters to donors for any single contribution greater than $250. Yet no reporting goes directly to IRS, which over the years has increasingly relied upon document matching as perhaps its primary way of enforcing proper reporting of individual’s income tax liability. Various options include requiring charities to send the IRS information they already must send to donors, or allowing a deduction only for contributions by some other third party (such as a tax preparer) who reports directly reports to the IRS.

Raising the Limit on the Deduction

The TCJA raised the annual limit on deductible contributions from 50 to 60 percent of adjusted gross income, perhaps under the notion that those who give away substantial contributions may be more sensitive to incentives. Another option would be to raise the limit even further or to expand the current carryover provision for excess contributions beyond the five years now allowed.

IRA Rollovers

Yet another proposal would expand the qualified charitable deduction (QCD) made out of individual retirement accounts (IRA). More generous than an itemized deduction, this provision currently allows some individual taxpayers over age 70 ½ to donate up to $100,000 from traditional IRAs to charity without having to count the distributions as taxable income and then separately take an itemized deduction for these contributions. Raising or eliminating the $100,000 annual limit on donations, lowering the age limit to 59 ½ (the age at which IRA owners may withdraw funds without penalty), or allowing taxpayers to deposit such giving in donor advised funds (currently ineligible for such tax treatment) could increase charitable giving for those unable to use the full benefit of the deduction.

Foundation Excise Tax

Another option would eliminate or reduce the excise tax on foundation income, which would increase net assets that foundations can distribute for charitable purposes. The current excise tax on income from foundation assets was initially intended to cover the IRS’s costs of overseeing the tax compliance of charitable organizations, but the monies were never appropriated for that purpose. For tax years beginning on or before Dec. 20, 2019, the excise tax was 2 percent of net investment income, but was reduced to 1 percent in certain cases. For tax years beginning after Dec. 20, 2019, the excise tax is 1.39 percent of net investment income, and there is no reduced 1 percent tax rate.

Allowing Charitable Deductions Up to April 15 or At the Time of Filing Tax Returns

In the America Gives More Act of 2014, the House of Representatives passed a proposal, sometimes called the April 15 option, which would allow individuals to take charitable deductions up to April 15 or the time of filing tax returns. The proposal costs the government almost nothing if there are no increases in charitable giving. In terms of bang per buck, or increased giving per dollar of revenue cost, it ranks very high, because the incentive for the most part only loses revenues to the extent there are additional gifts.

Economic and marketing evidence supports the notion that saliency matters: people would give more because they would be more aware of the size of the incentive, partly through the information tax return preparers and tax software developers provide.

Caps on Charitable Incentives

Prior to passage of TCJA, two proposals—a cap on total itemized deductions and a cap on the top rate at which deductions can be made—had been suggested to raise revenues or reduce incentives, mainly for higher-income taxpayers.

In 2017’s initial budget proposals, President Trump asked Congress to place an overall cap on itemized deductions of $100,000 per single return and $200,000 per joint return. Higher-income taxpayers with mortgage interest, property tax, and other deductions in excess of such amounts would have been left with no tax incentives to give, while others would be left with a subsidy only for their first dollars of giving, up to the point they hit the cap.

Similarly, a tighter limit could be placed on the share of income eligible for a deduction. Currently that limit equals 60 percent of AGI, though some carryforward of excess amounts is allowed.

During his 2020 presidential campaign, President Biden proposed yet another type of limit: capping the tax benefit of itemized deductions, including charitable contributions, to 28 percent of value, rather than at the taxpayer’s marginal tax rate. For instance, if the top statutory tax rate is 37 percent but the maximum tax subsidy rate for deductible contributions is set at 28 percent, then the subsidy for those in that 37 percent bracket would be reduced by about one-quarter.

Because these cap proposals apply to additional giving rather than the first dollars of giving, they would reduce total giving much more than many other types of limitations that raise the same amount of revenues, such as the floor discussed above.

Updated January 2024