How large are individual income tax incentives for charitable giving?
The individual income tax deduction for charitable giving provides a substantial incentive to give by reducing the economic cost of making a donation. In 2017, charitable giving by individuals is estimated to reach $292 billion at an annual revenue loss of approximately $57 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 Tax Policy Center suggest that for 2017, charitable giving by individuals could reach a total of $292 billion. Itemizers are estimated to provide about 82 percent of total charitable giving; nonitemizers provide about 18 percent of total charitable giving (table 1).
Giving by Income Group
Charitable giving patterns differ by income. Some research indicates that the value of the charitable deduction provides greater incentive for higher-income individuals because they face higher marginal rates, are more likely to itemize, and can give more to charity. Tax proposals that reduce incentives for higher-income individuals will have a disproportionate effect on the charities to which these individuals are more likely to give, such as higher education and museums. Table 2 shows the amount of charitable giving by adjusted gross income.
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 28 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 $28, so the deductible charitable gift has a net cost of only $72. The $28 is the amount of the federal subsidy for giving. If the taxpayer had a 40 percent tax rate, the donation becomes even less costly, 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 under current law. The average after-tax federal subsidy is 20.8 percent. Note that taxpayers in the top 1 percent have the lowest after-tax price of charitable giving.
Estimated Revenue Loss from Charitable Gifts, 2016- 20
The size of the after- tax price of charitable giving can have significant policy implications. For example, if losses in federal revenue from allowing the charitable deduction are greater than the increase in charitable giving caused by the deduction, then the entire amount of the federal subsidy for giving does not flow through to the charitable organizations receiving the gifts. The charitable deduction is estimated to cost approximately $57 billion in 2017 and $293 billion over five years (2016–20).
Limits on the Charitable Deduction
The charitable deduction has many limits. 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 50 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 generally are excluded from taxation.
Internal Revenue Service, “Statistics of Income Tax Stats: 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 2014.
Joint Committee on Taxation. 2017. Estimates of Federal Tax Expenditures for fiscal years 2016–2020. JCX-3-17.Washington, DC: Joint Committee on Taxation.
Urban-Brookings Tax Policy Center. “Microsimulation Model, version 0516-1.”
Boris, Elizabeth T., and C. Eugene Steuerle, eds. 2016. Nonprofits and Government: Collaboration and Conflict, 3rd ed. Lanham, MD: Rowman & Littlefield.
McKeever, Brice S., Nathan E. Dietz, and Saunji D. Fyffe. 2016. The Nonprofit Almanac, 9th ed. Lanham, MD: Rowman & Littlefield.
Rosenberg, Joseph, C. Eugene Steuerle, Joycelyn Ovalle, and Philip Stallworth. 2016. “The New Debate over a Charitable Deduction for Nonitemizers.” Washington, DC: Urban Institute.
Philip Stallworth, Chenxi Lu, and C. Eugene Steuerle, “Both Clinton and Trump would reduce tax incentives for charitable giving,” TaxVox (blog), November 4, 2016.