Universal Charitable Deduction
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 don’t itemize, you don’t 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.
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), and thus fewer people were eligible for the tax incentive of giving.
What is the current situation?
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.
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 12% of taxpayers. In effect, that means now only 12% of taxpayers receive a benefit for making a charitable contribution, while 88% receive no benefit at all.
On March 27, 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 27, 2020, the $900 billion Consolidated Appropriations Act of 2021 was signed into law, which included an increase for 2021in 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, which is now part of the Tax Code.
What is the Ideal Policy?
The Nonprofit Alliance 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.
What to Keep an Eye On?
In September, the Senate considered the proposed Republican Covid aid package, which included a provision raising the cap for the universal charitable deduction in 2020 to $600 for single taxpayers and $1,200 for married couples filing jointly. While the Senate Republican package failed to move forward, these higher cap levels are now part of the legislative history of this issue—a real plus as we move forward into 2021.
Last year in the Senate, the bipartisan S. 4032, the Universal Giving and Pandemic Response Act, proposed by Senators James Lankford (R-OK) and Chris Coons (D-DE), included a Universal Charitable Deduction and would raise the cap on the deductible amount to approximately $4,000 for single taxpayers and approximately $8,000 for married couples filing jointly. The Lankford-Coons bill was an important piece of legislation, which helped to raise the profile of this issue in the Senate.
In 2021, we expect that the Lankford-Coons bill will again be introduced in the new Congress.
Also see information about Overall Charitable Deductibility (coming soon)
Definitions of a few helpful terms
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.
Who are key players?
With most of the action on this issue in the Senate, the key players are all Senators:
IN THE U.S. SENATE
- James Lankford (R-OK)
- Chris Coons (D-DE)
- Tim Scott (R-SC)
- Jeanne Shaheen (D-NH)
- Mike Lee (R-UT)
- Amy Klobuchar (D-MN)
- Marsha Blackburn (R-TN)
- Gary Peters (D-MI)
- Susan Collins (R-ME)