Senators Push to Restore the Universal Charitable Deduction: 3 Things You Need to Know
Congress has reignited its desire to provide Americans with a universal charitable deduction to promote giving to nonprofit organizations.
Senators introduced legislation last week to make the universal charitable deduction effective for tax years 2023 and 2024. Now dubbed “Charitable Act,” the legislation, if passed, would give more Americans the ability to claim tax deductions for charitable contributions in the designated years.
Sens. James Lankford and Chris Coons led the bipartisan effort that would allow taxpayers who do not itemize on their tax returns to additionally deduct up to one-third of the standard deduction, so approximately $4,500 as individuals or about $9,000 if filing jointly for charitable deductions.
“Our families, our churches and other nonprofits are the first and most important safety net for the most vulnerable in our communities,” Lankford, an Oklahoma Republican, said in a statement. “... As Oklahomans and Americans donate their time, money and resources to our nation’s nonprofits so they can serve people, they should be able to deduct more from their federal taxes as an incentive to financially support nonprofits since these services are often in place of government benefits.”
The bill would rewrite part of section 170 of the Internal Revenue Code regarding taxpayers who elect to not itemize deductions:
“In the case of a taxable year beginning in 2023 or 2024, the deduction under this subsection for the taxable year shall be equal to so much of the deduction determined under this section (without regard to this subsection) for such taxable year as does not exceed an amount equal to 1/3 of the amount of the standard deduction with respect to such individual for such taxable year. This subsection shall apply only in the case of an individual who does not elect to itemize deductions for the taxable year.”
So, what does this mean for your nonprofit? Here are three things you need to know about the implications of the universal charitable deduction.
1. The Tax Cuts and Jobs Act of 2017 Discouraged Charitable Giving
Since 1917, the government has provided taxpayers with a tax deduction for nonprofit donations, according to the United Philanthropy Forum.
The Tax Cuts and Jobs Act of 2017 lowered individual income tax rates, nearly doubled the standard deduction and eliminated other itemized deductions. It might sound great for taxpayers, but it was bad for charities. The Urban-Brookings Tax Policy Center estimates that the law reduced the number of households claiming an itemized deduction for charitable contributions from 37 million to 16 million in 2018. In fact, the act raised the after tax cost of donating to charity by about 7%.
“Our legislation would make an overdue, commonsense change to offset the effects of the 2017 tax law, which weakened funding options for nonprofits nationwide,” Sen. Jeanne Shaheen, a Democrat from New Hampshire and co-sponsor of the bill, said in a statement.
Taxpayers can itemize deductions to continue to deduct charitable contributions, but, unfortunately, only about 12% of Americans do so. For most taxpayers, the standard deduction — which is $12,950 for individuals and $25,900 for those married filing separately for the 2022 tax year — provides the best tax benefit, especially as it continues to increase annually. That leaves no tax incentive for making charitable contributions for the majority of Americans.
“By limiting which taxpayers itemized their deductions, the law’s effect was to take away the tax incentive for charitable giving for all but about 12% of taxpayers,” the National Council of Nonprofits wrote in a letter to Sens. Lankford and Coons (opens as a pdf). “An American Enterprise Institute analysis confirms that the 2017 tax law did not generate greater charitable giving among upper-income taxpayers as predicted, but that charitable giving went down after its enactment.”
2. The Temporary Universal Charitable Deduction Increased Small Gifts
In March of 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act temporarily changed that by allowing up to $300 in cash contribution to be deducted on top of the standard deduction. Nine months later, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 extended that relief and increased the deduction to $600 for married couples filing jointly, according to the IRS.
Approximately 29% — or 42 million taxpayers — took advantage of the deduction in 2020, which accounted for $10.9 billion in charitable contributions, according to the IRS (opens as a pdf). And almost 24% of those taxpayers had an adjusted gross income of less than $30,000.
“We saw the success of [the universal charitable deduction] when it was instituted during the pandemic,” Rick Cohen, chief communications officer and chief operating officer at the National Council of Nonprofits, told NonProfit PRO via email. “There was a marked increase in the number of donations in the amount of $300, exactly the amount of the universal charitable deduction. The deduction encourages more giving, and that’s what our communities need right now.”
By introducing the Charitable Act, the Senate seeks to reinstate that incentive that expired at the end of 2021. Congress attempted to do just that in 2021 as well with the Universal Giving Pandemic Response and Recovery Act, but those attempts to renew it were unsuccessful.
“The charitable deduction is good tax policy,” the Charitable Giving Coalition said in a letter to Sens. Lankford and Coons (opens as a pdf). “It encourages individuals to give away more money to charity than they otherwise would. Unfortunately, the current charitable deduction is only available to those who itemize, roughly 12% of taxpayers.”
Since the deduction expired, giving numbers support that the lack of a universal charitable deduction has heavily impacted charitable contributions. Giving USA figures remained flat in 2021 when accounting for inflation, so even an influx of small gifts due to the temporary deduction wasn’t able to outpace inflation. Additionally, the latest Fundraising Effectiveness Project numbers show donors giving $100 or less dropped 15.4% and those contributing between $101 and $500 fell 7.8% year over year during the first three quarters of 2022.
Nonprofits’ current struggles with limited resources due to a decline in donations, an increase in costs and a higher demand for services makes now a pivotal time for the universal charitable deduction’s return.
“Just a few $300 donations can go a long way for a nonprofit with a budget of under $1 million — and that’s more than 90% of the sector,” Rick Cohen, chief communications officer and chief operating officer at the National Council of Nonprofits, said.
3. Your Donors Likely Support the Universal Contribution Deduction
Lankford also introduced Congress’ last attempt to extend the universal charitable deduction around this time last year. The Universal Giving Pandemic Response and Recovery Act called for up to $4,000 in charitable deductions for individuals and $8,000 for joint filers.
In regards to that, 77% supported expanding the universal charitable deduction to the $4,000 cap included in the legislation, while 85% of Americans said they supported permanently restoring the deduction, according to an Independent Sector poll.
However, the bill isn’t expected to pass by itself. Getting it included and passed within a packaged deal will also be an uphill battle.
“The greatest obstacle is paralysis on Capitol Hill,” Cohen said. “There is not much that a Republican-led House of Representatives and a Democrat-led Senate will agree on, so we’re not expecting a lot of action on any issue this year. But the bipartisan support that this measure has gives it at least some chance of being included in a larger bill.”
Nonprofits are used to advocating for their causes, but, to help move the bill along, they may want to consider advocating on behalf of the nonprofit sector.
“Urge everyone — staff, board members, donors, people they serve — to call their representative and senators and tell them to pass the bill,” Cohen said. “Nonprofits should also take advantage of when their representatives are in town to show them the work of their organization and to describe the impact of the additional donations that they could receive.”