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Universal Charitable Deduction

Recent Developments | November 28, 2023: A letter calling for enactment of the Universal Charitable Deduction legislation was sent to the four key congressional leaders on tax policy –  Finance Committee Chair Ron Wyden (D-OR), Finance Committee Ranking Republican Mike Crapo (R-ID), Ways & Means Committee Chair Jason Smith (R-MO), and Ways & Means Committee Ranking Democrat Richard Neal (D-MA). The letter included the names of over 1,000 charitable organizations, including TNPA, representing all 50 states. It was purposely sent on Giving Tuesday to emphasize the importance of Universal Charitable Deduction legislation to the sector.

The Latest | Momentum Continues on the Universal Charitable Deduction

The Nonprofit Alliance (TNPA) has continued its sustained effort toward enactment of Universal Charitable Deduction legislation. There are now 22 of the Senate’s 100 members who have signed on as cosponsors of S. 566, the Charitable Act, the bipartisan legislation of Senators James Lankford (R-OK) and Chris Coons (D-DE), which would provide a universal charitable deduction open to all taxpayers who contribute to charities regardless of their level of income. Based on recent meetings with several other Senators and their staffs, we anticipate additional Senators signing onto the legislation in the coming weeks.

Also, momentum is growing for the companion House version of the legislation, H.R. 3435, also entitled the Charitable Act. This measure, led by Representatives Blake Moore (R-UT), Danny Davis (D-IL), Michelle Steel (R-CA), and Chris Pappas (D-NH) now has 41 representatives who have signed on as cosponsors, and significantly we anticipate several more representatives will be signing onto the bill in the coming weeks.

Charitable Deductions: What is the issue?

Taxpayers are able to deduct from their taxable income the amount of charitable donations they made to nonprofit 501(c)3 organizations, and in this way, lower their overall tax liability (see the sidebar for definitions of a few key terms).

As a general rule of thumb, charitable contributions can only be a deducted if you itemize your personal deductions, instead of taking the standard deduction. If you do not itemize, you do not get the benefit.  The idea of a Universal Charitable Deduction allows people to deduct charitable contributions up to a maximum amount, regardless of their level of income and regardless of whether they itemize or take the standard deduction.

Currently, 88 percent of charitable giving is provided by only 13 percent of donors! The bipartisan Charitable Act would encourage more giving from middle-income and lower-income families that are not incentivized to give through the charitable deduction since they do not itemize.

In 2022, charitable giving fell to $499 billion, a 10.5 percent inflation-adjusted decline (a 3.4 percent decline in current dollars) and the largest year-over-year decline in total giving since Giving USA began tracking it in 1956. While all categories of charitable giving –  individual, foundation, bequest, and corporate – experienced declines after adjusting for inflation, individual giving had the largest drop of 13.4 percent.

Giving trends from 2020 and 2021, when the temporary non-itemizer charitable deduction was in place, indicate the deduction works. According to the Fundraising Effectiveness Project, charitable gifts of $300 — the cap of the temporary deduction in 2020 — increased by 28 percent on the last day of the year. Furthermore, interim Internal Revenue Service data for tax year 2021 shows 47 million households used the non-itemizer charitable deduction for donations totaling around $18 billion. A higher deduction cap, as included in the Charitable Act, would encourage even more charitable giving in communities across the country.

Why do nonprofits care?

The ability for individuals to deduct charitable donations from their tax liability acts as an incentive to charitable giving and encourages the flow of financial resources to support the work of nonprofits.  

When a larger standard deduction went into effect in 2018, fewer people itemized because people itemize only when itemizing would result in a deduction larger than the standard deduction. Thus, fewer people were eligible for the tax incentive of giving.

What is the Ideal Policy?

The Nonprofit Alliance (TNPA) calls on Congress to make the Universal Charitable Deduction a permanent provision in the Tax Code and to increase the $600 married/$300 single taxpayer cap on the Universal Charitable Deduction. 

Recent Activity

The enactment of the Tax Cuts and Jobs Act (TCJA) of 2017 effectively doubled the Standard Deduction to $12,000 for individual taxpayers and $24,000 for married couples filing jointly. Having been adjusted for changes in the Consumer Price Index (CPI), these levels have increased to $14,600 and $29,200 for 2024.

This change in the Standard Deduction reduced the number of taxpayers itemizing — and thus being able to claim a deduction for charitable contributions — from approximately 30% of all taxpayers to just 9% of taxpayers. In effect, this means only 9% of taxpayers are eligible to receive a benefit when making a charitable contribution, while, without the Universal Charitable Deduction, 91% receive no benefit at all.

In March of 2020, the $2.2 trillion CARES Act of 2020 was signed into law, including a universal charitable deduction of $300 per taxpayer regardless of whether filing as an individual or married for the tax year 2020. 

Then in December of 2020, the $900 billion Consolidated Appropriations Act of 2021 was signed into law, which included an increase for 2021 in the Universal Charitable Deduction to $600 for married couples filing jointly, while maintaining the deduction at $300 for single taxpayers.

TNPA was a leading voice in the effort to enact this important deduction.

In late 2022, it appeared the package of 27 expired tax provisions, including the  Universal Charitable Deduction, which expired on December 31, 2021, would be passed by Congress. Unfortunately, Congress could not come to closure on the package, leaving us without any Universal Charitable Deduction. A real frustration for nonprofits!

On February 28, Senators James Lankford (R-OK) and Chris Coons (D-DE) introduced their Universal Charitable Deduction legislation and renamed it from “The Universal Giving and Pandemic Response and Recovery Act,” to simply the “Charitable Act” (bill number S. 566). As was the case with the prior legislation, it again calls for a universal charitable deduction open to all taxpayers regardless of their level of income up to 1/3 of the current standard deduction, which is $14,600 for single tax filers and $29,200 for married couples filing jointly. Additionally, rather than being a one-year bill as was previously the case, The Charitable Act will run for two years – 2024 and 2025.

The level of the universal deduction in the legislation is more of an “aspirational” number, with the immediate focus again being on reinstating the deduction at $600 for married couples and $300 for single filers as was the case when the current legislation expired on December 31, 2021. Over the long term, TNPA’s ultimate goal is to eventually increase the size of the deduction from the $600/$300 level, and importantly, make it permanent.

Who are key players?

IN THE U.S. SENATE 

  • James Lankford (R-OK)
  • Chris Coons (D-DE)

IN THE U.S. HOUSE OF REPRESENTATIVES

  • Blake Moore (R-UT)
  • Chris Pappas (D-NH)
  • Michelle Steel (R-CA)
  • Danny Davis (D-IL)

Definitions

Deductions: A tax deduction is a deduction that lowers a person or organization’s tax liability by lowering their taxable income. Deductions are typically expenses that the taxpayer incurs during the year that can be applied against or subtracted from their gross income in order to figure out how much tax is owed. (investopedia)

Standard Deductions: The Internal Revenue Service (IRS) standard deduction is the portion of income not subject to tax that can be used to reduce your tax bill. You can take the standard deduction only if you do not itemize your deductions. The amount of the standard deduction is based on several factors including your filing status and age.

Charitable Deductions: Donations to 501(c)(3) nonprofits are tax-deductible. When you make a contribution (and receive nothing in return) to an organization that has been designated as a 501(c)(3) by the IRS, you are eligible for a deduction when you file your taxes.

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