Charitable giving is something many people do in order to support a cause they believe in or to help those in need. For some people, charitable giving is sporadic or occasional, while others give regularly on an annual basis. However people give, one of the benefits of giving is that donations are tax-deductible. Tax deduction is only worth it, though, if taxpayers’ deductions exceed the standard deduction.
Not only do donors rely on the deductibility of charitable gifts in making gifts, but charitable organizations also count on deductibility to ensure donations keep coming. At present, though, proposals to change federal tax law in this area threaten to upset the system by disincentivizing charitable giving.
A proposal currently under consideration in Congress would result in a repeal of the estate tax, a doubling of the standard deduction, and lowering income tax rates. The top tax rate would reportedly decrease from 39.6 percent to 35 percent. Some experts estimate that the changes could result in a reduction in charitable giving by $5 billion to $13 billion annually. Doubling of the standard deduction alone could result in only 5 percent of filers choosing to itemize deductions, compared to the current number of 25 percent.
Nonprofits, not wanting to openly oppose the proposal, have suggested adoption of a universal tax deduction which would allow taxpayers to deduct charitable donations even if they take the standard deduction. A universal deduction, though, would reduce government revenue and benefit high-income taxpayers the most.
For those who choose to give charitably, it is important to understand the tax rules in this area to avoid IRS investigation. In our next post, we’ll say more about this issue.