What is the Charitable Deduction?

Since 1917 policymakers have recognized the value of the charitable deduction, which has served as the bedrock of our altruistic society and is a model for the world. It must continue as a fundamental tenet of our tax system.

 
Only donations to IRS-qualified charitable organizations qualify for a charitable deduction. The IRS even provides an online tool that allows you to check the status of certain organizations. Additionally, the charitable tax deduction is only available to those who itemize on their taxes. Those who choose to claim the standard deduction do not qualify to receive a charitable deduction. About one-third of Americans choose to itemize their taxes and take a charitable deduction. That one-third of Americans accounts for over 80 percent of the individual charitable giving in the United States. This is one of the reasons why ACR is concerned about tax proposals that may reduce the number of Americans who itemize.

The charitable deduction is also tied to an individual’s tax rate as that determines the amount that can be deducted from taxable income. For example, if a person is in the 25 percent tax bracket, she will be allowed to deduct 25 cents of every dollar donated to charity from her taxable income.

Impact

According to Giving USA, Americans gave over $373 billion to support charitable causes in 2015. More than $265 billion of total giving was donated by individuals, much of which was claimed as a charitable deduction. Charitable giving alone accounted for 2.1 percent of GDP.

The charitable deduction is unique in that it encourages Americans to give away a larger portion of their income that they would not otherwise give. A quick calculation shows that those in need receive at least $2.50 of benefit for every $1 of tax benefit to the donor.

Limits

There are limits to the charitable deduction. In general, contributions to charitable organizations may be deducted up to 50 percent of adjusted gross income (AGI).  Contributions to certain private foundations, veterans organizations, fraternal societies, and cemetery organizations are limited to 30 percent of AGI.  Additionally, in a provision known as the Pease Limitation, the value of all deductions, including the charitable deduction, is reduced for high-income earners. In this sense, it “claws back” the value of the charitable deduction for some Americans.

Back to “Charitable Deduction Central.”