If you’ve shopped recently at your supermarket, there’s a good chance you faced a choice at the checkout counter: Whether to give to a charity.
These small, easy donation opportunities are hugely important to participating non-profits and can help boost the reputations of retailers. And they can make a shopper feel good, too. But like so much else these days, these giving opportunities have become controversial, in part because some critics insist retailers are taking a tax benefit for their customers’ donations.
Watch this TikTok video of a dramatized exchange at the counter. The video’s creator plays the roles of both cashier and customer. The cashier asks the customer to “round up” his bill by 25 cents and donate the extra change to a charity. The customer refuses, believing the corporate store owner will “dodge taxes” by taking a deduction for the customer’s contribution. The video’s creator appears righteous, but he is wrong, or at least confused.
Still, his video has over 516,000 “likes” and has been shared over 28,000 times on a platform with 100 million active monthly visitors in the US. More than three out of four of those users are under the age of 40. About one-third of them are between 10 and 19, and two are my own children.
Checkout charity generates millions of dollars in donations to nonprofit organizations. Misinforming a younger, more impressionable audience is bad for charitable giving and for their understanding of tax policy. I was tempted to respond to the video by recording a TikTok duet, but my kids forbade it. Instead, I asked Alex Reid, an expert on nonprofit tax law, to help me set the record straight.
To start, keep in mind that there are two ways charities can benefit from point-of-sale donations. The first is where the store donates a share of its sales. That type of donation is deductible by the business but not by its customers. The second way is where customers add something to their bill at the register with the extra amount going to charity. Customers can claim those amounts donated as deductions on their individual income tax return, though almost nobody ever does.
What happens when businesses donate money to charities at the point of sale?
In order to donate at the point of sale, a corporation (for example, a retailer) must engage in a co-venture with a nonprofit charitable organization. In that arrangement—often registered under state law—the corporation gives a percentage of its sales to a designated charity.
For example, my local grocery chain offers “community rewards” when I scan my shopper’s card at the checkout counter. A small share of its proceeds from my purchases goes to a community organization that I choose (my son’s middle school).
Corporations generally can deduct charitable gifts up to 10 percent of their taxable income in a given year. But perhaps the TikTok creator thinks corporations are dodging taxes when they reduce their taxable income by contributing to charities.
That would be a shame. In 2018, the 79 largest point-of-sale charity checkout campaigns raised over $486 million for the nonprofit sector in the United States, out of $427.1 billion donated to charities in total. Over the past thirty years, these programs have raised over $5.3 billion for various charities. Checkout campaigns might contribute small change, but even small change is better than zero.
What happens to the money you donate at the cash register?
This is where you round up your bill to give to a charity designated by the retailer, and the donation amount appears on your receipt. The store serves only as a collection agent for your gift. Assuming the business is following the law, it will not include your donation as part of its business receipts, or income, nor will it claim the charitable gift as an expense.
In other words, your gift has zero impact on the store’s income taxes. Keep in mind that the store chooses the receiving charity, so make sure it is one you can support. As a customer, the donation will appear on your receipt and you can claim it as a charitable deduction when you file your income tax return. But you probably won’t.
Here’s the real tax problem when you “round up” at the register.
Even with a receipt, more than nine out of 10 taxpayers won’t deduct this—or any other-- charitable donation from their federal taxable income. That’s because they do not itemize their deductions.
When the Tax Cuts and Jobs Act effectively doubled the standard deduction, the number of households claiming itemized deductions fell from 46.2 million in 2017 to 16.7 million in 2018. Most of those still itemizing their deductions are higher-income households. Those making more than $3.3 million annually get more than one-third of the federal income tax benefits from charitable giving, and few of these households are likely to do much of their giving at the grocery checkout counter.
The CARES Act that Congress passed last spring does allow non-itemizers to deduct up to $300 of charitable donations—but for 2020 only. And in reality, some taxpayers could cheat and claim the deduction without giving anything.
Maybe that young TikTok creator will create a video that illustrates how unfair it is that the tax benefits for charitable giving skew toward high-income households. Or maybe he’ll record one that calls for new ways to give non-itemizers a tax incentive to give.
Or maybe I will. Just don’t tell my TikTokking teenagers.
The Tax Hound, publishing once a month, helps make sense of tax policy for those outside the tax world by connecting tax issues to everyday concerns. Have a question or an idea? Send Renu an email.
If you’ve shopped recently at your supermarket, there’s a good chance you faced a choice at the checkout counter: Whether to give to a charity.
