The Coronavirus Aid, Relief, and Economic Security (CARES) Act creates two new tax benefits for donors to non-profits. One will mostly benefit low- and middle-income households, but do little for the charities it is intended to support. The other mostly will benefit a relative handful of high-income givers and may accelerate their donations to non-profits. But it isn’t likely to increase overall giving in the long term.
The first change will make a $300 deduction for charitable gifts available to the nine in 10 taxpayers who do not claim itemized deductions on their federal income tax returns. Non-profits have long advocated for such a universal deduction, but this one is remarkably badly designed.
A poor design
There can be real benefits to a universal deduction or a universal tax credit. But, as my Tax Policy Center colleague Gene Steuerle and others suggest, the best designs would target benefits to those who give more than they otherwise would, or at least more than a minimum amount of their income, say 1 or 2 percent. The worst designs set a very low cap on the maximum deduction and provide no incentive to increase giving. The CARES Act’s universal deduction fails on both counts.
Worse, it will be impossible for the IRS to know if those who claim the deduction actually gave anything at all to charity. It is, in effect, little more than a gift to anyone who claims the standard deduction. And the biggest beneficiaries will be those who claim the deduction without giving anything at all.
Of course, it will help those who drop a few dollars each week in the church collection plate (at least, it would if people were allowed to go to church during the coronavirus pandemic). But will it increase their gifts? Perhaps a little, but not by much.
The deduction cap
The second change lifts the cap on how much a donor can deduct in charitable gifts in a single year. Until the 2017 Tax Cuts and Jobs Act (TCJA), individuals could immediately deduct gifts valued at no more than half their adjusted gross income (AGI), with the excess deductible in future years. The TCJA boosted the cap to 60 percent of AGI, and the CARES Act eliminates the cap entirely for 2020. Thus, a donor can fully deduct gifts equal to as much as 100 percent of their AGI this year.
For businesses, the new law also increases the limit on the deduction for charitable contributions from 10% to 25% of a corporation’s taxable income.
The CARES Act includes some caveats: The increased limits for individual and corporate taxpayers apply to cash contributions only. They also are limited to gifts to public charities and certain foundations. They do not apply to gifts to donor-advised funds.
Eliminating the AGI cap may benefit charities this year, since it may accelerate the timing of donations that might otherwise have been given over the next few years. And given the enormous financial pressure on non-profits and the importance of the services some of them are providing during the pandemic, that would be a good thing.
The real winners
But the real winners will be some wealthy donors. Overall, very few taxpayers—probably no more than 2 percent—give even one-third of their AGI to charity. Many of these generous donors have relatively low incomes. For example, older adults with some wealth but little annual income may give charities assets equal to a large share of their income. Very few of these taxpayers itemize, so they would not benefit from the increased deduction cap.
While just a handful of very wealthy taxpayers give away such a large fraction of their income, they likely will account for an outsized share of the dollar value of gifts in excess of 60 percent of AGI. And nearly all of them do itemize and would benefit from the change.
A missed opportunity
The effects of this provision may be partially offset by another section of the CARES Act that could reduce the incentive for some wealthy taxpayers to give to charity. The new law allows people age 72 or older to defer Required Minimum Distributions (RMDs) from their retirement accounts for 2020. Because older adults who do not need the extra income can avoid tax on those distributions by giving them to charity, putting off RMDs may reduce their charitable giving somewhat.
Overall, the CARES Act will help some non-profits, including hospitals that are frequent recipients of large gifts from wealthy donors. That may be valuable in the current pandemic. But for the most part, the charitable provisions of the CARES Act are a missed opportunity to improve the charitable deduction. They will do little to increase giving to non-profits in the long run.
