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The Tax Policy Center's

Briefing Book

A citizen’s guide to the fascinating (though often complex) elements of the US tax system.

Tax Policy Center Briefing Book

Key Elements of the U.S. Tax System

  • Briefing Book
  • Taxes and Charitable Giving
  • How large are individual income tax incentives for charitable giving?
  • Chapters
    • Introduction
      • Introduction
        • Introduction
    • Some Background
      • Federal Budget
        • What are the sources of revenue for the federal government?
        • How does the federal government spend its money?
        • What is the breakdown of revenues among federal, state, and local governments?
        • How do US taxes compare internationally?
      • Federal Budget Process
        • How does the federal budget process work?
        • What is the history of the federal budget process?
        • What is the schedule for the federal budget process?
        • What is reconciliation?
        • How is a budget resolution enforced?
        • What is PAYGO?
        • What are rescissions?
      • Federal Budget Outlook
        • How accurate are long-run budget projections?
        • What have budget trends been over the short and long term?
        • How much spending is uncontrollable?
        • What are tax extenders?
        • What options would increase federal revenues?
        • What does it mean for a government program to be off-budget?
        • How did the TCJA affect the federal budget outlook?
      • Taxes and the Economy
        • How do taxes affect the economy in the short run?
        • How do taxes affect the economy in the long run?
        • What are dynamic scoring and dynamic analysis?
        • Do tax cuts pay for themselves?
        • On what do economists agree and disagree about the effects of taxes on economic growth?
        • What are the economic effects of the Tax Cuts and Jobs Act?
      • Economic Stimulus
        • What is the role of monetary policy in alleviating economic downturns?
        • What are automatic stabilizers and how do they work?
        • What characteristics make fiscal stimulus most effective?
      • Distribution of Tax Burdens
        • How are federal taxes distributed?
        • Are federal taxes progressive?
        • How should progressivity be measured?
        • What is the difference between marginal and average tax rates?
        • What criticisms are levied against standard distributional analysis?
        • How should distributional tables be interpreted?
        • Who bears the burden of the corporate income tax?
        • Who bears the burden of federal excise taxes?
        • How do financing methods affect the distributional analyses of tax cuts?
        • How do taxes affect income inequality?
      • Tax Expenditures
        • What are tax expenditures and how are they structured?
        • What is the tax expenditure budget?
        • Why are tax expenditures controversial?
        • What are the largest tax expenditures?
        • How did the TCJA affect tax expenditures?
      • Tax Gap and Tax Shelters
        • What is the tax gap?
        • What does the IRS do and how can it be improved?
        • What is a tax shelter?
      • Recent History of the Tax Code
        • What did the 2008–10 tax stimulus acts do?
        • What did the American Taxpayer Relief Act of 2012 do?
        • How did the Tax Cuts and Jobs Act change personal taxes?
        • How did the Tax Cuts and Jobs Act change business taxes?
    • Key Elements of the U.S. Tax System
      • Individual Income Tax
        • What is the standard deduction?
        • What are itemized deductions and who claims them?
        • How did the TCJA change the standard deduction and itemized deductions?
        • What are personal exemptions?
        • How do federal income tax rates work?
        • What are tax credits and how do they differ from tax deductions?
        • How do phaseouts of tax provisions affect taxpayers?
      • Capital Gains and Dividends
        • How are capital gains taxed?
        • What is the effect of a lower tax rate for capital gains?
        • What is carried interest, and how is it taxed?
        • How might the taxation of capital gains be improved?
      • AMT
        • What is the AMT?
        • Who pays the AMT?
        • How much revenue does the AMT raise?
        • How did the TCJA change the AMT?
      • Taxes and the Family
        • What is the child tax credit?
        • What is the adoption tax credit?
        • What is the earned income tax credit?
        • Do all people eligible for the EITC participate?
        • How does the tax system subsidize child care expenses?
        • What are marriage penalties and bonuses?
        • How did the TCJA change taxes of families with children?
      • Taxes and the Poor
        • How does the federal tax system affect low-income households?
        • What is the difference between refundable and nonrefundable credits?
        • Can poor families benefit from the child tax credit?
        • Why do low-income families use tax preparers?
        • How does the earned income tax credit affect poor families?
        • What are error rates for refundable credits and what causes them?
        • How do IRS audits affect low-income families?
      • Taxes and Retirement Saving
        • What kinds of tax-favored retirement arrangements are there?
        • How large are the tax expenditures for retirement saving?
        • What are defined benefit retirement plans?
        • What are defined contribution retirement plans?
        • What types of nonemployer-sponsored retirement savings accounts are available?
        • What are Roth individual retirement accounts?
        • Who uses individual retirement accounts?
        • How does the availability of tax-favored retirement saving affect national saving?
        • What’s the difference between front-loaded and back-loaded retirement accounts?
        • What is an automatic 401(k)?
        • How might low- and middle-income households be encouraged to save?
      • Taxes and Charitable Giving
        • What is the tax treatment of charitable contributions?
        • What entities are tax-exempt?
        • Who benefits from the deduction for charitable contributions?
        • How would various proposals affect incentives for charitable giving?
        • How large are individual income tax incentives for charitable giving?
        • How did the TCJA affect incentives for charitable giving?
      • Taxes and Health Care
        • How much does the federal government spend on health care?
        • Who has health insurance coverage?
        • Which tax provisions subsidize the cost of health care?
        • How does the tax exclusion for employer-sponsored health insurance work?
        • What are premium tax credits?
        • What tax changes did the Affordable Care Act make?
        • How do health savings accounts work?
        • How do flexible spending accounts for health care expenses work?
        • What are health reimbursement arrangements and how do they work?
        • How might the tax exclusion for employer-sponsored health insurance (ESI) be reformed?
      • Taxes and Homeownership
        • What are the tax benefits of homeownership?
        • Do existing tax incentives increase homeownership?
      • Taxes and Education
        • What tax incentives exist for higher education?
        • What tax incentives exist to help families pay for college?
        • What tax incentives exist to help families save for education expenses?
        • What is the tax treatment of college and university endowments?
      • Tax Complexity
        • Why are taxes so complicated?
        • What are the benefits of simpler taxes?
        • What policy reforms could simplify the tax code?
      • Wealth Transfer Taxes
        • How do the estate, gift, and generation-skipping transfer taxes work?
        • Who pays the estate tax?
        • How many people pay the estate tax?
        • What is the difference between carryover basis and a step-up in basis?
        • How could we reform the estate tax?
        • What are the options for taxing wealth transfers?
        • What is an inheritance tax?
      • Payroll Taxes
        • What are the major federal payroll taxes, and how much money do they raise?
        • What is the unemployment insurance trust fund, and how is it financed?
        • What are the Social Security trust funds, and how are they financed?
        • Are the Social Security trust funds real?
        • What is the Medicare trust fund, and how is it financed?
      • Excise Taxes
        • What are the major federal excise taxes, and how much money do they raise?
        • What is the Highway Trust Fund, and how is it financed?
      • Energy and Environmental Taxes
        • What tax incentives encourage energy production from fossil fuels?
        • What tax incentives encourage alternatives to fossil fuels?
        • What is a carbon tax?
      • Business Taxes
        • How does the corporate income tax work?
        • What are pass-through businesses?
        • How are pass-through businesses taxed?
        • Is corporate income double-taxed?
      • Tax Incentives for Economic Development
        • What is the new markets tax credit, and how does it work?
        • What is the Low-Income Housing Tax Credit and how does it work?
        • What are Opportunity Zones and how do they work?
      • Taxes and Multinational Corporations
        • How does the current system of international taxation work?
        • How do US corporate income tax rates and revenues compare with other countries’?
        • What are the consequences of the new US international tax system?
        • How does the tax system affect US competitiveness?
        • How would formulary apportionment work?
        • What are inversions, and how will TCJA affect them?
        • What is a territorial tax and does the United States have one now?
        • What is the TCJA repatriation tax and how does it work?
        • What is the TCJA base erosion and anti-abuse tax and how does it work?
        • What is global intangible low-taxed income and how is it taxed under the TCJA?
        • What is foreign-derived intangible income and how is it taxed under the TCJA?
    • How Could We Improve the Federal Tax System?
      • Comprehensive Tax Reform
        • What is comprehensive tax reform?
        • What are the major options for comprehensive tax reform?
      • Broad-Based Income Tax
        • What is a broad-based income tax?
        • What would and would not be taxed under a broad-based income tax?
        • What would the tax rate be under a broad-based income tax?
      • National Retail Sales Tax
        • What is a national retail sales tax?
        • What would and would not be taxed under a national retail sales tax?
        • What would the tax rate be under a national retail sales tax?
        • What is the difference between a tax-exclusive and tax-inclusive sales tax rate?
        • Who bears the burden of a national retail sales tax?
        • Would tax evasion and avoidance be a significant problem for a national retail sales tax?
        • What would be the effect of a national retail sales tax on economic growth?
        • What transition rules would be needed for a national retail sales tax?
        • Would a national retail sales tax simplify the tax code?
        • What can state and local sales taxes tell us about a national retail sales tax?
        • What is the experience of other countries with national retail sales taxes?
        • What did the President’s Advisory Panel on Federal Tax Reform say about the national retail sales tax?
      • Value Added Tax (VAT)
        • What is a VAT?
        • How would a VAT be collected?
        • What would and would not be taxed under a VAT?
        • What would the tax rate be under a VAT?
        • What is the difference between zero rating and exempting a good in the VAT?
        • Who would bear the burden of a VAT?
        • Is the VAT a money machine?
        • How would small businesses be treated under a VAT?
        • What is the Canadian experience with a VAT?
        • Why is the VAT administratively superior to a retail sales tax?
        • What is the history of the VAT?
        • How are different consumption taxes related?
      • Other Comprehensive Tax Reforms
        • What is the flat tax?
        • What is the X-tax?
      • Recent Comprehensive Tax Reform Proposals
        • Simple, Fair, and Pro-Growth: Proposals to Fix America’s Tax System, Report of the President’s Advisory Panel on Federal Tax Reform, November 2005
        • The Moment of Truth: Report of the National Commission on Fiscal Responsibility and Reform, December 2010
        • Debt Reduction Task Force, “Restoring America’s Future,” Bipartisan Policy Center, November 2010
        • The Tax Reform Act of 2014: Fixing Our Broken Tax Code So That It Works for American Families and Job Creators, House Ways and Means Committee
        • The Graetz Competitive Tax Plan, Updated for 2015
      • Return-Free Tax Filing
        • What is return-free filing and how would it work?
        • What are the benefits of return-free filing?
        • What are the drawbacks of return-free filing?
        • How would the tax system need to change with return-free filing?
        • Who would qualify for return-free filing?
        • Would return-free filing raise taxes?
        • What was the experience with return-free filing in California?
        • What other countries use return-free filing?
    • The State of State (and Local) Tax Policy
      • State and Local Revenues
        • What are the sources of revenue for state governments?
        • What are the sources of revenue for local governments?
      • Specific State and Local Taxes
        • How do state and local individual income taxes work?
        • How do state and local sales taxes work?
        • How do state and local property taxes work?
        • How do state and local corporate income taxes work?
        • How do state estate and inheritance taxes work?
        • How do state earned income tax credits work?
        • How do state and local severance taxes work?
        • How do state and local soda taxes work?
        • How do marijuana taxes work?
      • Fiscal Federalism and Fiscal Institutions
        • How does the deduction for state and local taxes work?
        • What are municipal bonds and how are they used?
        • What types of federal grants are made to state and local governments and how do they work?
        • What are state rainy day funds, and how do they work?
        • What are tax and expenditure limits?
        • What are state balanced budget requirements and how do they work?
    • Glossary
      • Glossary
        • Glossary

How large are individual income tax incentives for charitable giving?

Taxes and Charitable Giving

<5/6>
Individual Taxes
Q.

How large are individual income tax incentives for charitable giving?

A.

The individual income tax deduction for charitable giving provides a substantial incentive to give by reducing the economic cost of making a donation. In 2018, charitable giving by individuals is estimated to reach $299 billion at an annual revenue loss of around $44 billion.

Charitable Giving by Itemizers and Nonitemizers

An income tax deduction for charitable giving is available only to taxpayers who itemize their deductions. Estimates from the Urban-Brookings Tax Policy Center (TPC) suggest that for 2020, charitable giving by individuals could reach $324 billion. TPC estimates that the 90 percent of households that do not itemize their deductions will contribute about 40 percent of total charitable giving, while the 10 percent of households who itemize will provide about 60 percent (table 1).

 

Giving by Income Group

Charitable giving patterns differ by income. The charitable deduction provides higher-income taxpayers with a larger tax subsidy per dollar donated, because such taxpayers are more likely to itemize deductions and because they generally face higher tax rates. Some research indicates that higher-income taxpayers are more responsive or sensitive to each dollar of tax subsidy—that is, each dollar of government cost generates more charitable contributions—perhaps because a subsidy is more salient to those more likely to use tax advisers, or simply because they tend to consume a smaller share of their income and therefore have a larger share of income out of which they can give.

Tax proposals that affect incentives for higher-income individuals to give, however, will have a disproportionate effect on the charities to which these individuals are more likely to donate, such as higher education and museums.

Table 2 shows the amount of charitable contributions for taxpayers claiming an itemized deduction for those contributions in the last year before the number of itemizers was substantially reduced. It does not include giving by nonitemizers. A few things to note: First, most low- and moderate-income taxpayers do not claim a deduction for charitable contributions, largely because most do not itemize. Second, at high-income levels, about 90 percent or more taxpayers claim charitable deductions (before TCJA). And third, the pattern of deductible charitable giving as a percentage of income is U-shaped—average giving is very high for the small percentage of low-income taxpayers who claim a deduction, as well as for the large percentage of very high income taxpayers. The pattern of giving for atypical low-income taxpayers who itemize, however, may not be indicative of giving—or, for that matter, of unrealized income that doesn’t show up in adjusted gross income—by all low-income households.

 

Average Tax Incentive for Giving

The after-tax cost of giving is the value of the gift minus any tax benefits received. If an itemizing taxpayer with a marginal tax rate of 24 percent (that is, the tax rate on the last dollars of income) gives $100 to a local college, for instance, the gift reduces the income tax bill for that person by $24, so the deductible charitable gift has a net cost of only $76. The $24 is the amount of the federal subsidy for giving. If the taxpayer had a 40 percent tax rate, the donation becomes even less costly to the taxpayer, at only $60. In other words, as tax rates increase, the after-tax “price” of charitable giving decreases.

Figure 1 shows a summary of the average after-tax price of charitable giving for taxpayers at different income levels in 2020. For the entire population, it is about 85 percent; that is, on average the after-tax federal subsidy is 15 percent. This represents a drop of about 6 percentage points from the average federal subsidy rate of around 21 percent before the passage of the 2017 Tax Cuts and Jobs Act. Note that taxpayers in the top 1 percent have the lowest after-tax price of charitable giving both because they face higher tax rates and because they are more likely to itemize.

 

Estimated Revenue Loss from the Charitable Deduction

The individual charitable deduction is estimated to cost approximately $44 billion in 2020 and $230 billion over five years (2019–23) (table 3). The relationship between the revenue loss and the amount of additional giving created by the tax incentive has significant policy implications. For example, if the loss in federal revenue from allowing the charitable deduction is greater than the increase in charitable giving caused by the deduction, then a portion of the federal subsidy is going to donors rather than to the ultimate beneficiaries of charitable gifts. To the extent that Congress views charitable and government efforts as direct substitutes, it might be more efficient to eliminate the deduction and provide charities with direct federal support.

This sometimes leads to proposals, such as allowing a deduction only for giving that exceeds a dollar floor, to concentrate a greater share of the tax incentive on the last rather than first dollars of giving by any taxpayer getting the incentive. Research suggests that first dollars of giving are much less responsive to tax incentives. Studies on the impact of the tax incentive, however, do not deal with and therefore may underestimate the extent to which the presence of a tax incentive helps create a culture of giving.

 

Limits on the Charitable Deduction

Congress has placed many limits on the availability of a charitable deduction. Among them are the following:

  • The charitable deduction is only available for a subset of qualifying tax-exempt organizations that are charitable in nature, as defined in section 501(c)(3) of the tax code.
  • Contributions for individuals are generally allowed up to 60 percent of adjusted gross income, but there is a 30 percent limit for contributions to a foundation and certain other organizations and a 30 percent limit for contributions of capital gain property. Deductible contributions for corporations are limited to 10 percent of corporate income.
  • Contributions to many tax-exempt organizations, such as unions and chambers of commerce, are not deductible, though income earned on assets within those organizations is generally excluded from taxation.
Data Sources

Internal Revenue Service. Statistics of Income Tax Stats: Individual Income Tax Returns Publication 1304 (Complete Report). Table 2. “Individual Income Tax Returns with Itemized Deductions: Sources of Income, Adjustments, Itemized Deductions by Type, Exemptions, and Tax Items,” classified by size of adjusted gross income, tax year 2017.

Joint Committee on Taxation. 2019. “Estimates of Federal Tax Expenditures for Fiscal Years 2019–2023.” JCX-55-19. Washington, DC: Joint Committee on Taxation.

Urban-Brookings Tax Policy Center. “TPC Microsimulation Model, version 0319-2.”

Further Reading

Boris, Elizabeth T., and C. Eugene Steuerle, eds. 2016. Nonprofits and Government: Collaboration and Conflict, 3rd ed. Lanham, MD: Rowman & Littlefield.

McClelland, Robert, C. Eugene Steuerle, Chenxi Lu, and Aravind Boddupalli. 2019. “Tax Incentives for Charitable Contributions.” Washington, DC: Tax Policy Center.

McKeever, Brice S., Nathan E. Dietz, and Saunji D. Fyffe. 2016. The Nonprofit Almanac, 9th ed. Lanham, MD: Rowman & Littlefield.

McKeever, Brice S. 2019. “The Nonprofit Sector in Brief 2018: Public Charities, Giving, and Volunteering.” National Center for Charitable Statistics. Washington, DC: Urban Institute.

Rosenberg, Joseph, C. Eugene Steuerle, Joycelyn Ovalle, and Philip Stallworth. 2016. “The New Debate over a Charitable Deduction for Nonitemizers.” Washington, DC: Urban Institute.

Stallworth, Philip, Chenxi Lu, and C. Eugene Steuerle. 2016. “Both Clinton and Trump Would Reduce Tax Incentives for Charitable Giving.” TaxVox (blog). November 4.

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