The Tax Cuts and Jobs Act of 2017, a sweeping piece of legislation aimed at stimulating economic growth, brought about significant changes to the tax code, including a provision that dramatically altered the landscape of charitable giving in the United States. By nearly doubling the standard deduction, the law effectively eliminated the universal charitable deduction, a long-standing feature of the tax code that allowed all taxpayers to deduct a portion of their charitable donations, regardless of whether they itemized deductions on their tax returns. This change, while justified by lawmakers with arguments of simplification and economic efficiency, has had far-reaching implications for the nonprofit sector and the communities it serves.
The Rationale Behind the Elimination
Proponents of the 2017 tax bill argued that eliminating the universal charitable deduction would simplify the tax code and promote economic growth. They contended that the increased standard deduction would streamline the tax filing process for millions of Americans, reducing the complexity and burden associated with itemizing deductions. This simplification, they argued, would free up resources for individuals and businesses, encouraging investment and stimulating economic activity.
Furthermore, supporters of the change argued that the universal charitable deduction was inefficient and inequitable. They pointed out that the deduction disproportionately benefited higher-income taxpayers who were more likely to itemize deductions and had larger amounts of disposable income to donate. By eliminating the universal deduction, they argued, the tax code would become more equitable, ensuring that tax benefits were distributed more evenly across all income levels.
The Impact on Charitable Giving
Despite the justifications offered by lawmakers, the elimination of the universal charitable deduction has had a significant impact on charitable giving in the United States. Studies have shown that the change has led to a substantial decrease in the number of taxpayers claiming charitable deductions, particularly among those with lower and moderate incomes. This decline in giving has translated into a significant loss of revenue for nonprofit organizations, hindering their ability to provide essential services to communities across the country.
Estimates suggest that the elimination of the universal charitable deduction has cost nonprofits billions of dollars in donations each year. A 2020 report by the Fundraising Effectiveness Project found that charitable giving declined by an estimated $16 billion in 2018, the first year the higher standard deduction went into effect. This decline in giving has been particularly acute among smaller nonprofits and those serving vulnerable populations, which often rely on small-dollar donations from a broad base of donors.
The COVID-19 Pandemic and the Temporary Reinstatement of the Deduction
The COVID-19 pandemic underscored the vital role of charitable organizations in providing essential services and support to those in need. Recognizing the importance of incentivizing charitable giving during this time of crisis, Congress temporarily reinstated a limited universal charitable deduction as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020.
This temporary provision allowed taxpayers to deduct up to $300 in charitable donations, even if they did not itemize deductions on their tax returns. The deduction was later expanded to $600 for married couples filing jointly in 2021. This temporary reinstatement of the universal charitable deduction provided a much-needed boost to the nonprofit sector, encouraging giving at a time when it was most needed.
The Charitable Giving Coalition and the Push for a Permanent Universal Deduction
The temporary universal charitable deduction implemented during the COVID-19 pandemic demonstrated the positive impact that such a provision can have on charitable giving. This has led to renewed calls for a permanent universal charitable deduction, with advocacy groups, such as the Charitable Giving Coalition, leading the charge.
The Charitable Giving Coalition, a diverse group of nonprofit organizations, foundations, and corporate partners, is working to educate lawmakers and the public about the importance of restoring a universal charitable deduction. They argue that such a deduction would incentivize giving across all income levels, benefiting countless charities and the communities they serve.
The Charitable Act: A Bipartisan Effort to Restore the Deduction
One proposed piece of legislation that aims to restore the universal charitable deduction is the Charitable Act. Introduced in both the Senate and the House of Representatives, this bipartisan bill would expand and extend the charitable deduction for non-itemizers, allowing for a higher deduction amount than the previous $300 allowed during the pandemic.
The Charitable Act has garnered broad support from both sides of the aisle, reflecting a growing recognition of the importance of incentivizing charitable giving. Proponents of the bill argue that it would not only benefit the nonprofit sector but also strengthen communities and promote civic engagement. However, it has yet to be passed!
Now, with renewed efforts to make a universal charitable deduction a permanent fixture of the tax code, there is hope for a future where donating to charity is once again encouraged and rewarded by the tax system. The Charitable Act, with its bipartisan support, represents a promising step towards restoring this important incentive for charitable giving, ensuring that nonprofits have the resources they need to continue their vital work in communities across the country.