09 April 2019

Millions Decline to Itemize: What It Means for Giving

As April 15, commonly referred to as Tax Day, approaches, the Alliance for Charitable Reform will issue a series of articles examining the topics impacting the charitable sector as a result of the passage of the Tax Cuts and Jobs Act. This article discusses the impact of the legislation’s goal to reduce the number of Americans who will choose to itemize. Click here to read part 1.

Congress chose to preserve the charitable deduction in the Tax Cuts and Jobs Act (TCJA). That was a win for the sector as many deductions were eliminated or directly reduced. However, simplification was also a primary goal of legislators working on tax reform, and one provision they believed would help achieve that goal was to increase the standard deduction. The final version of the TCJA doubled the standard deduction to $12,000 for individuals and $24,000 for married couples, meaning fewer Americans would need to itemize their deductions.

ACR applauded Congress’ objectives of economic growth and simplification in tax reform in a statement following the passage of the TCJA.  We also expressed gratitude that the legislation preserved the charitable deduction for those taxpayers who itemize. However, we reiterated our concern, as did others in the sector, that an unintended consequence of an increased standard deduction and reduced number of itemizers would be a reduction of charitable giving.

We still don’t know the final tally of how many Americans itemized in 2018 – that information won’t be available for quite some time. However, the Tax Policy Center estimates that 21 million fewer taxpayers will itemize charitable deductions compared with the previous year — from 37 million to 16 million. This means the overwhelming majority of Americans will be ineligible for the charitable deduction, likely resulting in many Americans reducing their giving to charities.

At a time when the number of Americans giving to charity is already declining, eliminating the charitable giving incentive for middle- and low-income givers seems a step backwards and could jeopardize the health of many institutions of civil society, particularly smaller, community-based charities.

Alan Viard, resident scholar at the American Enterprise Institute, writes in analysis expected to be fully released later this month that the “TCJA’s increase in the standard deduction appears to have been intended to indirectly curtail itemized deductions that were seen as unjustified but were too popular to directly limit. Unfortunately, increasing the standard deduction is a problematic way to curb tax preferences.”

He goes on to say:

The impact on charitable contributions and owner-occupied housing vividly illustrates the limitations of using a larger standard deduction to curtail tax preferences. The increase in the standard deduction reduces the incentive for charitable giving, despite the absence of any stated rationale for reducing that incentive. The increase in the standard deduction also confines the incentive for charitable giving to a relatively small group of largely affluent taxpayers, moving it even further away from a uniform incentive that promotes giving by all income groups.

Viard details two negative effects of the expanded standard deduction. First, it eliminated the charitable deduction for almost all middle- and low-income households, but preserved it for the wealthy. Secondly, it reduces the incentive for people to give. While we know that Americans do not give because of the tax code, it certainly encourages people to give more than they otherwise would.

ACR believes that we should recognize the gifts of all Americans regardless of income and itemizer status. By expanding the charitable deduction to all Americans whether or not they itemize, lawmakers would not only strengthen charitable giving but recognize that charitable gifts from all Americans are important to maintaining a robust and independent civil society regardless of the income or economic standing of the donor.

In the next post in ACR’s Tax Day series, we examine the surprise of some Americans upon filing their taxes for the first time after the full implementation of the TCJA.