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Saturday, August 4, 2018

Charitable donations above the line?

H.R. 5771 proposes to make the charitable contribution deduction one for AGI rather than an itemized deduction. This is not a new idea, but one that affects more individuals because the Tax Cuts and Jobs Act changes mean that rather than 30% of individuals itemizing, only about 13% will itemize. Of course, among those itemizers are many big donors.

The Tax Policy Center estimates that the change will reduce donations for 2018 by about 5%. The Joint Committee on Taxation estimates that the "cost" of the charitable contribution deduction for 2018, claimed by about 16.4 million individuals is $41 billion (JCX-34-18, page 49). For 2017, the estimate was 35.8 million individuals claiming it at a cost of $58 billion (JCX-3-17, page 45). Part of the drop in "cost" is due to rate reductions, but most is due to more people claiming the standard deduction. This JCT data is not a good indicator of change in donations because many newly claiming the standard deduction may very likely continue to give as much as they did before.

The "cost" of an above-the-line deduction would be significant as many people donate to charity including those who always itemize. Should the deduction be available to everyone? Would a credit be better? A credit would be worth the same to all taxpayers. A deduction is worth a lot more to those in higher tax brackets. For example, someone donating $1,000 who is in the 37% bracket is only out of pocket $630 after taxes. In contrast someone in the 12% bracket is out of pocket $880.  Or put another way, all taxpayers are providing a greater subsidy to higher bracket donors.

A challenge with the charitable contribution is that the benefit not only goes to the donor, but to the charities they chose to support. Do people at all income levels support the same charities? Probably not (a good area for some study - let me know if you've seen such a study).

What about modifying H.R. 5771 to only allow a deduction to the extent it exceeds 3% (or some other percentage) of your modified AGI where that term is defined as AGI before the donation and with tax-exempt interest and various exclusions such as for foreign-earned income added back?  This won't cost as much (meaning we might not have to have a rate increase to pay for the change) and recognizes that giving some percentage of your before-tax income is expected, but if you give above that amount, you'll get a tax break.

Not perfect because not everyone can estimate their income well enough to know if they should be keeping records of donations because they might exceed the threshold, but certainly not as complex as many other tax rules that exist.

What do you think?

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