Policy Update
Fact Sheet on Changes to Itemizer/Nonitemizer Deduction Provisions
12/02/2005
Source: Independent Sector
Here is a fact sheet on the proposed changes to the Charitable Tax Deduction included in the Tax Relief Act of 2005 recently passed by the Senate.
We have received information from the Center on Budget and Policy Priorities which has helped to inform this paper, and we understand that there will be a report on the charitable contributions of itemizers prepared by the Congressional Research Service that will be coming out in the near future.
As we prepare for the return of the House and Senate for their final work in 2005, we need to be thinking carefully about our legislative work with Congress. We have been told by Senate Finance Committee staff that the current package of reforms and incentives is designed as a revenue-neutral package and removal of certain reforms could mean the removal or curtailment of incentives.
Nonetheless, we will continue to work towards achieving changes to those measures that go beyond the recommendations of the Panel on the Nonprofit Sector and that we believe could be harmful to charitable giving and charitable nonprofits.
We thank all of you who have been keeping us informed of your lobbying efforts and the positions taken by your organizations with regard to these reforms and incentives, and encourage all of you to communicate with us about your work and your concerns in this regard.
See below for a fact sheet and list of frequently asked questions.
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FACT SHEET:
The Charitable Deduction Changes for Itemizers and Non-Itemizers
In S.2020, the Tax Relief Act of 2005
CURRENT PROPOSAL
The Senate has recently passed the Tax Relief Act of 2005 (S. 2020) which includes a provision that would permit taxpayers who claim the standard deduction (“non-itemizers”) to take a deduction for their total cash contributions over $210 for single filers and over $420 for joint filers.
Taxpayers who itemize deductions will be permitted to deduct the total of both cash and non-cash contributions over $210 ($420 for joint filers). Both provisions are intended to be in place for two years, although it appears that a technical change may be required to clarify that the changes for taxpayers who itemize deductions also expire at the end of the two-year period.
The proposal is expected to be largely revenue neutral, resulting in an estimated revenue loss of approximately $2 million over ten years (since the proposals are only in effect for two years), because the added cost of the deduction for non-itemizers would be offset by the revenues raised by limiting deductions by itemizers.
BACKGROUND
Since 1986, only taxpayers who itemize their deductions on their annual tax returns have been able to claim tax deductions for contributions they made to charitable organizations. This deduction lowers the cost of giving for those taxpayers by 15 to 40 cents per dollar, based on the taxpayer’s marginal tax rate. The over 86 million taxpayers who claim the standard deduction--over two-thirds of all taxpayers--receive no tax benefit for their charitable contributions.
Proposals offered by President Bush in his annual budget requests for Fiscal Years 2002 and 2003 would have permitted all taxpayers to deduct the full amount they contributed to charitable organizations subject to specific rules and limitations. The cost of these proposals to the federal government was estimated from $32.6 billion to $52.2 billion over ten years.
The President’s budget proposals for fiscal years 2004 and 2005 would have allowed taxpayers who do not itemize deductions to deduct aggregate contributions that exceed $250 ($500 for married taxpayers filing joint returns) up to a maximum deduction of $250 ($500 for married taxpayers filing joint returns), with a cost to the federal government of over $12 billion over a ten year period.
This proposal was included in both the CARE Act of 2003 and the Charitable Giving Act of 2003, which were passed by the Senate and the House of Representatives respectively by overwhelming margins. The two congressional bodies were not able to resolve differences in their bills before the end of the legislative session in 2004, and this provision was not enacted into law.
The President did not include a provision to extend the charitable deduction to non-itemizers in his 2006 budget proposal, and efforts to provide such a deduction in the current Congress have been complicated by the challenging fiscal environment facing the federal government.
In developing a proposal which would provide a revenue-neutral deduction for charitable contributions to all taxpayers, the Senate Finance Committee explored a number of options for permitting all taxpayers to take tax deductions for their charitable contributions and included the proposal described above in the Tax Relief Act of 2005 which was passed by the Senate on November 18, 2005.
STATUS OF LEGISLATION
The Senate-passed bill now moves forward to the House of Representatives which currently does not include any charitable giving provisions in its companion bill, the Tax Relief Extension Reconciliation Act of 2005 (H.R. 4297). When the House passes its bill, there will need to be a conference between the House and the Senate to resolve differences between the two bills. During that process, the provision could be modified to include a different floor or to restrict the change to non-itemizers, the provision could be eliminated altogether, or it could be accepted in its current form.
BENEFITS OF THIS PROPOSAL:
* Increases Giving
Extending the tax deduction for charitable contributions to the 86 million taxpayers who do not itemize deductions would provide a critical incentive that is expected to increase both the number of donors and the total dollars contributed to charitable organizations.
A study completed by the Urban Institute based on 1995 tax data projected that if all taxpayers were allowed to deduct charitable contributions above a higher floor ($250 for single filers and $500 for joint filers), giving would increase between $1.9 billion and $7.2 billion per year.
* Increases Fairness
All Americans should be encouraged to make charitable contributions through a fair system of tax incentives. The charitable deduction for nonitemizers treats all taxpayers who make charitable donations on a more even basis.
* Simplifies the Tax Incentives for Charitable Giving
This provision is a significant step towards treating all charitable contributions as “above-the-line” deductions which lower the taxpayer’s adjusted gross income (AGI), just as deposits to individual retirement accounts currently reduce the taxpayer’s AGI. Currently, taxpayers who itemize deductions are permitted to take a “below the line” deduction which reduces to a lesser degree the amount of the taxpayer’s taxable income.
Providing similar rules for all taxpayers reduces confusion for taxpayers in determining how much they wish to give, makes it easier for charitable organizations to explain the tax incentives to prospective donors, and could simplify tax administration for the government.
* Provides a Modest Tax Benefit for Low- and Middle-Income Taxpayers
Most lower-income taxpayers, who make up the majority of nonitemizers, currently do not receive any additional tax relief for their charitable giving. In addition, the nearly 13 million taxpayers reporting less than $50,000 in annual income who currently itemize deductions and claim deductions for charitable contributions may also benefit from this proposal by being able to take the standard deduction and claim deductions for their gifts over $210 (or $420 for joint filers), thereby increasing their total tax deductions.
* Is Achievable this Year
This proposal is largely revenue neutral, and thus offers the first chance in many years that Congress will enact a fair tax deduction for charitable donations made by non-itemizers. This opportunity is unlikely to be available in future years.
DISADVANTAGES OF THIS PROPOSAL
* Reduces the Tax Benefit Taxpayers who Itemize Deductions Currently Receive for their Charitable Contributions
Single taxpayers at the lowest tax rate (15%) who currently itemize deductions would lose the tax benefit they receive for the first $210 in charitable gifts they make, thus increasing their tax bill by $32, although their cost of giving would continue to be lowered by 15 cents for ever dollar over $210 they contribute.
At the highest tax rate of 40%, single taxpayers would find their tax bill would increase by $84 for the first $210 in charitable gifts they make, while their cost of giving would continue to be lowered by 40 cents for ever dollar over $210 they contribute.
* Tax Administration Could be More Difficult for the IRS
Extending a tax benefit for charitable contributions to the over 86 million taxpayers who take the standard deduction would increase the scope of audit issues related to charitable contributions for the Internal Revenue Service.
INDEPENDENT SECTOR POSITION
Since its creation, Independent Sector has supported extending the charitable deduction to all taxpayers. It is important for all Americans, including those of modest means, to be encouraged to make charitable contributions through a system of tax incentives, and all taxpayers should receive similar tax deductions for those contributions.
While this proposal would increase the cost of giving for the first $210 contributed by single taxpayers who itemize deductions, Independent Sector holds that this reduction in benefits for some taxpayers is offset by the increased charitable giving that would result from extending a charitable deduction to the over 86 million taxpayers who currently take the standard deduction.
FREQUENTLY ASKED QUESTIONS:
1. Who benefits from the proposed changes in the charitable giving deduction?
The 86 million Americans who do not itemize deductions, primarily low to middle income taxpayers, and some of the nearly 13 million Americans earning less than $50,000 annually who do claim charitable tax deductions could also receive a greater tax benefit if they take the standard deduction and claim deductions for their charitable gifts under the proposed provision.
In addition, by generating increased contributions to the charitable sector, this proposed charitable giving incentive would be very beneficial for the charitable organizations that rely on donations from the public to support their work and the people who benefit from the services of those organizations. Research from the Urban Institute indicates that charitable contributions could increase by as much as $7.2 billion annually.
2. Who would lose from the proposed changes in the charitable giving deduction?
The 38.6 million Americans who itemize tax deductions and claim deductions for charitable giving would lose the tax benefits they currently receive for the first $210 (or $420 for married taxpayers filing jointly) they contribute to charitable organizations.
A new research study expected to be released in the near future by the Congressional Research Service indicates that 93% of charitable contributions claimed by taxpayers who itemize deductions exceed the amounts established in the Senate bill.
3. Why does Congress want to change the deduction for charitable contributions for itemizers? Won’t this decrease the incentive to give?
Congress is interested in allowing all Americans to receive a tax benefit for their gifts to charitable causes, but the cost of previous proposals to extend this incentive to taxpayers who don’t itemize their deductions has been considered to be prohibitive in the current fiscal environment by the Administration and many members of Congress.
The President’s original proposal to allow all taxpayers to deduct their full charitable contributions was estimated to cost the federal government over $7 billion per year, while allowing non-itemizers to take a modest deduction of up to $250 for gifts over $250 (the amounts would double for married taxpayers filing jointly) would cost over $1 billion per year.
In order to provide a fair deduction for charitable contributions to all taxpayers that is revenue-neutral, the Senate has proposed that all taxpayers be permitted to deduct their contributions above a floor of $210 for single filers and $420 for joint filers.
Single taxpayers at the lowest tax rate (15%) would find their tax bill would increase by $32 for the first $210 in charitable gifts they make, but the cost of giving would continue to be lowered by 15 cents for ever dollar over $210 they contribute.
At the highest tax rates of 40%, single taxpayers would find their tax bill would increase by $84 for the first $210 in charitable gifts they make, but the cost of giving would continue to be lowered by 40 cents for ever dollar over $210 they contribute. Economic analysts project that this proposal would serve as a strong incentive for increased giving, and would expand the pool of prospective donors by providing a tax incentive for gifts by non-itemizers.
4. Isn’t this a slippery slope where Congress could easily increase the amount above which taxpayers can deduct their contributions?
This provision is written to last only two years, and if there is no further action by Congress, it would automatically expire returning to the current tax deduction for itemizers only.
During the two years the provision is in place, charitable organizations will be able to determine the actual effects of the new policy on the giving behavior of donors and can guide the Congress as to whether or not the provision should be allowed to expire, extended as is or modified to apply only to non-itemizers, or any other changes that seem appropriate.