Monday, February 6, 2012

In Context: Charitable Giving

Many Americans give to charities and other non-profit groups (e.g. churches) in the belief that they will be able to deduct the amount given from their taxable income. While it is true that charitable donations are tax deductible, the issue is more complicated than it appears. In order to get the tax benefit, an individual must itemize their deductions. In fact, only about 33% of Americans actually do this. Why? Well, taxpayers are given a choice. They can deduct from their taxable income all of the allowable IRS itemized deductions or they can deduct a “standard” deduction (currently $5,800 for individuals). They can’t do both, however. For most low and middle class households, the $5,800 standard deduction is greater than the cumulative amount of itemized deductions. At the other end of the income spectrum, most high income homes do itemize. This raises an interesting point: The majority of Americans don’t receive a tax benefit by giving to charity but the wealthiest do.

It might make sense, therefore, to make charitable giving an “above the line” deduction (those deductions that are available regardless of whether a taxpayer itemizes or not) in order to give low and middle class taxpayers an opportunity to benefit by giving to worthwhile institutions. Some may argue that the people who take the standard deduction already benefit by receiving a deduction that is larger than all of their itemized deductions added together. This argument, while logical, is beside the point. The point is that right now, the people who take the standard deduction have no tax incentive to give to charity. Congress needs to decide whether it wants to encourage giving, by allowing charitable donations to be deductible at all. The IRS tax code should not, however, favor charitable giving by one income group or another.