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November 13, 2018
The Charitable Deduction for Individuals
The charitable deduction is a long-standing feature of the
times since enactment. Key legislative changes relevant to
individual income tax. It is also one of the largest individual
this In Focus are highlighted next.
income tax provisions in terms of annual forgone revenue,
an estimated $58.1 billion in FY2018. However, as a result
Table 1. Limitations on Charitable Contributions
of various changes implemented by the 2017 tax revision
(P.L. 115-97), the tax expenditure for charitable
Valuation
contributions is expected to fall to $45.1 billion for
Type of
Rules for
FY2019. This In Focus provides background information
Donation
Recipient
Property
Limit
on the charitable deduction. Tax provisions for corporate
Public charity; private Basis of the 60% of
contributions and charitable bequests are not addressed.
operating foundation; property
AGIb
Cash or
The Deduction
federal, state, local
short-term
government
Under current law, taxpayers who itemize their deductions
gain capital
can—subject to certain limitations—deduct charitable
property
Private non-operating Basis of the 30% of
donations to qualifying organizations. Qualifying
foundation; othera
property
AGI
organizations are generally “public charities” or “private
Public charity; private Fair market 30% of
foundations” with tax-exempt status under Internal Revenue
operating foundation; value
AGI
Code (IRC) Section 501(c)(3); federal, state, or local
federal, state, local
governments; and other less common types of qualifying
Long-term
government
organizations.
capital gain
property
Private non-operating Basis of the 20% of
Tax-deductible donations to qualifying organizations can be
foundation; othera
property
AGI
in the form of cash or property. Property held for more than
Source: Internal Revenue Code (IRC) Section 170.
one year is often referred to as long-term capital gain
Note: These are general rules, and there are numerous exceptions.
property. Property held for less than a year is often referred
to as short-term capital gain property. Depending on (1) the
a. Includes qualifying contributions to veterans’ organizations,
type of property donated and (2) the type of qualifying
fraternal societies, and nonprofit cemeteries. Not all non-
organization that receives the donations, there are
operating foundations are subject to the 30% limit.
limitations on the total dollar amount that can be deducted
b. Temporarily increased from 50% to 60% through 2025.
by the taxpayer in a given tax year. The limitations are
defined as a percentage of the taxpayer’s adjusted gross
Over time, Congress has modified the maximum amount
income, or AGI (computed without regard to net operating
that can be deducted in a given year by changing the
loss carrybacks), as noted in Table 1. If the amount
income limitation. In 1952, as part P.L. 82-465, Congress
deducted exceeds the taxpayer’s AGI limitation, the excess
raised the limitation to 20% of AGI. In 1954, Congress
can be carried forward and deducted on future years’ tax
increased the maximum deduction limit to 30% of AGI
returns for up to five years.
(P.L. 83-591) for donations to certain public charities. The
Tax Reform Act of 1969 (P.L. 91-172) raised the deduction
For non-cash donations, there are rules on how to value the
limit to 50% of AGI for donations to public charities and
property. Depending on the type of property and the
allowed deductions for contributions to private operating
recipient organizations, the property is generally valued at
foundations. The 1969 act also imposed a 30% limit for
its basis (i.e., what the taxpayer originally paid for the
contributions of appreciated property and imposed other
property with adjustments) or its fair market value (how
restrictions on contributions of long-term capital gain
much the taxpayer would receive in an open market for the
property. The Deficit Reduction Act of 1984 (P.L. 98-369)
property at the time it is donated), as noted in Table 1.
raised the limitation on the deduction for donations of cash
or short-term capital gain property to private non-operating
Selected Legislative Background
foundations from 20% to 30% of AGI.
The charitable deduction was first enacted to offset the
potential negative effects of increased income taxes on
There were exceptions to these limits for particularly large
charitable giving as part of the War Income Tax Revenue
gifts. The Revenue Act of 1924 (P.L. 68-176) specified that
Act of 1917 (P.L. 65-50). The overall amount that could be
if a taxpayer made contributions exceeding 90% of net
deducted was limited to 15% of net taxable income to
income in the tax year and each of the past 10 years, a full
prevent taxpayers from eliminating tax liability by claiming
deduction was allowed. A phaseout of the unlimited
the deduction. The deduction has been changed dozens of
deduction was included in the Tax Reform Act of 1969.
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The Charitable Deduction for Individuals
In the early 1980s, temporary changes provided a charitable
fall into this class. In contrast, an estimated 4% of the
deduction to non-itemizers. The Economic Recovery Act of
charitable deduction tax expenditures are associated with
1981 (P.L. 97-34) allowed taxpayers who took the standard
tax returns filed in income classes of $100,000 or less (76%
deduction to claim an additional deduction for charitable
of tax returns filed fall into a $100,000 or less income
giving. This temporary provision went into effect in 1982,
class). Charitable deduction tax expenditures have become
and was allowed to expire as scheduled at the end of 1986.
even more concentrated in the highest income category
following the changes made in P.L. 115-97.
The 2017 tax revision (P.L. 115-97) temporarily increased
the AGI limit for cash donations made to public charities to
Figure 2. Distribution of Returns Filed and Charitable
60%. This change went into effect in 2018, and is set to
Deduction Tax Expenditures, by Income Class
expire December 31, 2025.
2018
Cost
The charitable deduction is estimated to result in $58.1
billion in forgone revenue in FY2018, $54.1 billion from
the individual income tax and $4.0 billion from the
corporate income tax (see Figure 1). During the past
decade, tax expenditures associated with the charitable
deduction have fluctuated, largely following patterns in
charitable giving. Individual charitable giving fell between
2008 and 2009, as a result of the Great Recession. The post-
recession recovery in giving has increased in recent years,
and is reflected in the tax expenditure estimates.
Tax expenditures associated with the charitable deduction
are also expected to be lower following the 2017 tax
revision (P.L. 115-97). P.L. 115-97 approximately doubled
Source: Joint Committee on Taxation.
the standard deduction and limited or repealed other
itemized deductions. As a result, fewer taxpayers are
Only taxpayers who itemize deductions can claim a
expected to claim itemized tax deductions generally,
deduction for charitable donations. In 2017, 32% of tax
including the deduction for charitable contributions.
filers itemized deductions. Following P.L. 115-97, for the
Further, lower marginal tax rates also reduce the tax
2018 tax filing year, it is estimated that 13% will itemize
expenditure associated with the deduction for charitable
deductions.
contributions. Both of these factors mean reduced tax
incentives for giving following P.L. 115-97.
Policy Options and Considerations
There tends to be agreement that the tax code should
Figure 1. Charitable Deduction Tax Expenditures
support charitable giving. The 2017 tax revision (P.L. 115-
FY2008-FY2022
97) retained the charitable deduction. Broadly, however, the
higher standard deduction, limitations on other itemized
deductions, and lower marginal tax rates reduced charitable
giving incentives. The Tax Policy Center has estimated that
these changes could result in charitable donations falling by
about 5%. Further, the marginal incentive for charitable
giving tends to be strongest at the top of the income
distribution.
There are various policy options related to charitable giving
incentives. For example, the deduction could be modified to
allow non-itemizers to receive tax benefits for donations.
This would increase the incentive to give for many lower-
and middle-income tax filers. Alternatively, a floor could be
imposed, restricting deductions for charitable giving to
Source: Joint Committee on Taxation.
giving above some threshold. There would be no marginal
incentive to give small amounts, but there would be a tax
Distribution of Benefits
incentive to give larger amounts. The deduction could also
Tax expenditures for charitable deductions largely benefit
be converted to a credit, equalizing the subsidy for giving
higher-income taxpayers. Higher-income taxpayers tend to
by individuals in different tax brackets. Another way to
(1) have a greater ability to give; and (2) derive a larger tax
equalize the value of the deduction for taxpayers in
benefit from each dollar given since they generally face
different tax brackets is to cap (or make fixed) the rate of
higher marginal tax rates. An estimated 84% of tax
the deduction. Other changes to the deduction might
expenditures for charitable giving in FY2018 will be
include modified AGI limits or changes related to valuation
claimed by taxpayers in the $200,000-and-above income
of non-cash gifts.
class (see Figure 2). Overall, an estimated 6% of returns
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The Charitable Deduction for Individuals
Margot L. Crandall-Hollick, Specialist in Public Finance
Molly F. Sherlock, Specialist in Public Finance
IF11022
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