By substantially cutting the number of taxpayers who will receive a charitable deduction, the Tax Cuts and Jobs Act (TCJA) has created an opportunity for charities to help redesign the tax subsidies that are so important to their fundraising. Indeed, they—and Congress—are almost compelled to do so.
After all, the TCJA’s overhaul of the individual income tax leaves only a little over one-tenth of households — mainly high-income taxpayers — eligible to deduct their charitable gifts in 2018. Because the new law significantly increases the standard deduction (to $12,000 for singles and $24,000 for couples), and trims some key itemized deductions, the vast majority of taxpayers will forego itemizing. As a result, the number of households taking the charitable deduction will fall from 37 million to 16 million.
A charitable deduction available only to the most affluent donors may not be politically sustainable. That said, nonprofits must present Congress not simply with a wish list but with alternatives that can better encourage giving without adding significantly to the rising federal budget deficit and in a way that is easily administrable by the IRS.
Non-profit organizations also must acknowledge public concerns about the way they are managed. Often, they receive only limited support from both Democratic and Republican lawmakers, who sometimes see them as just another special interest group. These same policy makers read widespread stories of abuse, including overvaluation of deductions claimed by taxpayers.
Lawmakers question whether highly-compensated executives at non-profits are as committed to their charity’s mission as its contributors. Indeed, the TCJA also imposed a new excise tax on non-profits that pay their executives $1 million or more and a new tax on investment income earned by private colleges with large financial endowments.
That said, as charities face budget cuts and the people they serve lose services, it seems easier than ever to make the case that government should renew its commitment to a strong and effective charitable sector.
A widely-available tax benefit for charitable donations could be a marvelous way to demonstrate that the US government and the public value those who help others. It could strongly reinforce and champion America’s exceptional tendency to solve problems through charitable efforts. In return for this and other reforms, nonprofits would agree that legislation should be designed around evidence as to what best encourages giving.
Here are three ways Congress could improve tax incentives for charitable giving at little or no additional loss of revenue.
First, extend the charitable deduction to everyone, but only for charitable contributions that are greater than some stated share of income. This could encourage more giving but concentrate the tax subsidy on those gifts above what people would likely give without a deduction. Such a design could not only be more cost-effective but it would limit the gifts that a resource-constrained IRS would have to monitor.
Second, let people deduct right away any gifts they make through April 15 (or before they file their tax returns) rather than keeping the current law’s December 31 deadline. This schedule, like the one the Tax Code applies to contributions to individual retirement accounts, would provide more bang per buck than almost any other charitable incentive I have examined. The House has passed such a bill in the past.
Third, improve the system charities use to report the gifts they receive to donors and to the IRS. Yes, reporting to the IRS what they usually report to individuals would mean a bit more work and expense for non-profits, but this simple step would reduce tax cheating and generate additional revenue that Congress could use to enhance tax incentives for real givers.
Of course, these efforts may go nowhere if attempts are not made to improve the image of the nonprofit world. We need a long-term and broad campaign focused on extolling examples of generosity, with less attention to specific charities or campaigns since people vary widely in the types of efforts they like to support.
The losses to charities in the new tax law are significant — a decline of about 30 percent in the federal tax subsidy for charitable giving. Yet this adversity may create an opportunity to design cost-effective tax subsidies, reduce tax non-compliance, and enhance the reputation of charities. A drive to strengthen the nation’s charitable efforts provides common ground for a nation desperately in need of reforms that unite rather than divide us.
A longer version of this essay was first published in the Chronicle of Philanthropy.