Congress now seems prepared to begin to address tax reform. This week we have heard about some of the reforms proposed and fortunately, there seems to be a consensus to maintain the charitable deduction.
There has been a lot of discussion in the nonprofit sector about the need for the charitable deduction to be maintained and concerns that it could be eliminated with tax reform. The charitable deduction has now been in place for 100 years. It was established in 1917 during World War I. Even during the “War to End All Wars,” Congress recognized the importance of charitable giving to local communities. This continues to be true in the modern world.
This year studies indicated that for each $1 in revenue lost to the federal government through the charitable deduction there are $3 in services provided by charitable organizations that government might have to otherwise provide. This $3 to $1 return is a good investment both fiscally and for local communities as a whole.
Total charitable giving in 2016 according to the annual Giving USA report totaled $390 billion. Giving from individuals reached an all-time high, up 3.9 percent and represented 72 percent of the total ($282 billion). Bequests represented another 8 percent of the total ($30 billion). In total 80 percent came from individuals.
One of the proposed reforms is roughly doubling the standard deduction to approximately $12,000 for an individual and $24,000 for a couple. So, the first $24,000 of a family’s income would not be taxed. An article this week in the Chronicle of Philanthropy expresses some concern that the doubling of the standard deduction could reduce individual giving by $13 billion, according to the CEO of the Independent Sector. This is based on a study commissioned by the Independent Sector with the Indiana University Lilly Family School of Philanthropy. Looking at the study I found that the range estimated was $4.9 billion to $13.1 billion.
My own experience with charitable giving does not bear out this concern that a higher standard deduction would lower charitable giving. My experience is that lower income earners are often very generous and give a higher percentage of their income than those earning higher incomes. I recall from my days working at United Way my amazement with the generosity of the housekeeping staff at hotels. What I learned from these generous people is that they had friends and family members who had received assistance from a nonprofit and therefore understood the need and felt blessed that they were in a position to give. My experience tells me that a higher standard deduction could result in these lower income earners increasing their charitable giving with more in their paycheck to give.
Digging deeper into the above mentioned report in the notes section was a statement on assumptions about non-itemizers: “One limitation of that is common to this literature is the assumption that non-itemizers will share a tax-price of giving elasticity with itemizers. In other words, the assumption being made is that their behavior will be the same when it is likely that there are actually some differences in their behavior.” So it seems the study authors have some questions about this assumption and my experience is there are differences in their behavior.
Currently approximately 30 percent of taxpayers itemize their charitable gifts and most of these are in the top brackets. Approximately 80 percent of total individual giving comes from this 30 percent of taxpayers. Maintaining the charitable deduction is an important inducement for itemizers to give more and will hopefully be maintained as proposed.
Another proposal is to eliminate the estate tax. The current estate tax impacts very few households since there is currently an $11 million exemption for a married couple, so only the very wealthy are impacted. My prediction is the estate tax will be eliminated.
What will be interesting to follow is whether or not there will be any changes in the rules regarding heirs receiving a step up in basis of appreciated assets. I will also be closely following any changes to the current laws allowing qualified charitable distributions from IRAs directly to charities. The current law allowing up to $100,000 to be given directly to charities by those 70 1/2 years old with the gift counting toward their required minimum distribution has been a very beneficial charitable giving tool.
It will be interesting to follow the tax reform changes and there are certainly many chapters to be written. Hopefully, charitable giving and its $3 to $1 return on investment will continue to be valued in the discussion.
– Phil Hanson is president and CEO of the Truman Heartland Community Foundation, based in Independence.