What is the Charitable Deduction?

Since 1917 the federal tax code has recognized the value and independence of civil society through the charitable deduction. It has supported a culture of giving that has made the United States the most charitable nation in the world and served as the bedrock of free society. It is also a fundamental tenet of our income tax system and prevents people from being taxed on money they freely give away.

Only donations to IRS-qualified charitable organizations qualify for a charitable deduction. Additionally, the charitable tax deduction is only available to those who don’t take a standard deduction but rather itemize their deductions on their taxes. Previously, about one-third of taxpayers itemized, but that number is expected to be cut by more than half after the passage of the Tax Cuts and Jobs Act in 2017. This may reduce both the number of Americans who give and the total dollars given to charity, which could exacerbate the already alarming decline in Americans giving to charity that has persisted since 2006.

Impact

According to Giving USA, Americans gave approximately $410 billion to support charitable causes in 2017. More than $287 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 the donor does not receive anything tangible in return, and is financially no better off for giving. This contrasts with other common deductions, such as the mortgage interest deduction, which, in effect, allows home buyers to purchase a more expensive home – for themselves.  It also encourages Americans to give away a larger portion of their income than they otherwise might. 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, cash contributions to charitable organizations may be deducted up to 60 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.

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