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Why do we have a charitable tax deduction, anyway?
The history of the tax deduction for charitable giving and why charities are worried it could change.
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CORRECTION: In the original web story, we incorrectly referred to the tax break you get for a charitable donation. The deduction is the total amount of the charitable donation, you only get a portion back as a tax break. The text has been corrected.
The holiday season is the time when many Americans do their end of the year charitable giving. A third of American tax payers itemize deductions and 80 percent of those Americans take advantage of the charitable tax deduction. As we head toward the fiscal cliff, capping deductions for charitable giving is being discussed in Congress as a revenue booster, but nonprofits are worried if that happens, donations will drop off.
Why do any of us get a deduction for charitable giving, anyway?
Joe Thorndike, the director of the Tax History Project at Tax Analysts, says you have to go back to World War I for the answer. Nearly a century ago, Americans paid income taxes at a rate of 77 percent to help fund the war effort.
"So this was designed as an off-set for wartime tax burdens," says Thorndike. "They were going to try to insulate charities from the negative effect that would probably flow from those new high tax rates." And Thorndike adds that, back then, the rich were the only Americans who paid income taxes, so the charitable tax deduction was designed to benefit, well, the rich.
Fast forward to another war, World War II. To fund that war, the government broadened the tax base, which meant more people could use the charitable tax deduction. Still, says Thorndike, the richer you are, the higher the tax bracket you're in, the more you get back. Someone in the 35 percent tax bracket gets a $350 break for a $1,000 charitable donation. Someone who makes less money and is in the 25 percent bracket gets less, only $250.
Some economists say that's not fair and everyone should get the same benefits from giving. But, John Ashmen, president of the Association of Gospel Rescue Missions, says that change would will hurt charities.
"At a time when we should be encouraging everyone and giving everyone possible an incentive to help the poor, we seem to be experimenting with disincentive," says Ashmen.
Joe Thorndike says the debate over the charitable tax deduction makes for strange bed-fellows.
"It makes perfect sense when you think about it, but it's sort of odd to hear a poor person's advocate make a rich person's argument," says Thorndike. He says the question politicians are wrestling with, as we head toward the fiscal cliff, is whether the value to the nonprofits outweighs the cost of the charitable tax deduction to the federal budget.
I wish someone would point out that the charitable income tax deduction really only benefits the well to do, or at least well enough off to qualify for a mortgage, because you have to have enough itemized deductions for it to even count.
I used to volunteer at a tax filing center that helped low income households file their federal and state income tax returns for free. Almost all of the returns I filled out were for people who qualified for the Earned Income Tax Credit, which was why the anti-poverty, not-for-profit organization ran the center. Many of the people had receipts for the thousands of dollars that they tithed to their church. And I don't remember a single return (other than my own, since one of the perks of volunteering was being able to use the center's tax software to file my own returns) for which the taxpayers had itemized deductions that totaled more than their standard deduction.
On the other hand, since they also qualified for state income tax forgiveness, their state income tax refund didn't count as taxable income in the following year (line 10, 2011 Form 1040), which I would point out to my clients, so they would know the answer to that question when they came to the tax center the following year.
Do I think people who take the standard deduction shouldn't bother with charitable donations? Hardly, especially since those politicians who support cutting government anti-poverty programs also expect not-for-profits, like the one that ran the tax center, to find the money to keep people from starving or dying of treatable illnesses. The pleasure of working to make the world a better place have untold benefits. Just don't fret about keeping receipts, if the federal government isn't going to give you credit for your generosity.
"Someone in the 35 percent tax gets a $350 deduction for a $1,000 charitable donation. Someone who makes less money and is in the 25 percent bracket gets a smaller deduction of only $250. "
Apparently you don't know the meaning of the word "deduction". In both cases, the deduction is the same: $1,000.
Yes this definitely wasn't stated very clearly; the "deduction" is the same. But I think the real point here is that since you are effectively donating with pre-tax dollars, the same donation actually costs you less if you are in the higher tax bracket (after you subtract the tax you would have had to pay without the deduction). And that is at least interesting to consider.
On the one hand the fact that the rich man's dollar has effectively become more valuable than the poor man's seems unfair. But on the other hand ... might that not actually encourage the rich man to give more than he would otherwise? [After all his dollar is only worth more if it is given to charity.]
And for those like myself, who just barely break even at the end of each year, it really is a direct trade off; the less tax I pay the more I have to give (and the more I will give).
