Curtail the Deduction for Charitable Giving

CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.

Billions of Dollars 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2017-2021 2017-2026
Change in Revenues 4.2 21.2 22.2 23.1 24.1 25.0 25.9 26.9 27.9 28.9 94.8 229.4

Source: Staff of the Joint Committee on Taxation.

This option would take effect in January 2017.

Current law allows taxpayers who itemize to deduct the value of their contributions to qualifying charitable organizations. By lowering the after-tax cost of donating to charities, the deduction provides an added incentive to donate. In calendar year 2014 (the most recent year for which data are available), taxpayers claimed $211 billion in charitable contributions on 36 million tax returns.

The deduction is restricted in two ways. First, charitable contributions may not exceed 50 percent of a taxpayer's adjusted gross income (AGI) in any one year. (AGI includes income from all sources not specifically excluded by the tax code, minus certain deductions.) Second, the total value of certain itemized deductions—including the deduction for charitable donations—is reduced if the taxpayer's AGI is above $259,400 for taxpayers filing as single or $311,300 for taxpayers filing jointly in 2016. The thresholds are adjusted, or indexed, to include the effects of inflation.

This option would further curtail the deduction for charitable donations while preserving a tax incentive for donating. Only contributions in excess of 2 percent of AGI would be deductible for taxpayers who itemize. That amount would still be subject to the additional reduction described above for higher-income taxpayers. Limiting the deduction to contributions in excess of 2 percent of AGI would match the treatment that now applies to unreimbursed employee expenses, such as job-related travel costs and union dues. Such a policy change would increase revenues by $229 billion from 2017 through 2026, the staff of the Joint Committee on Taxation (JCT) estimates.

An argument in favor of this option is that, even without a deduction, a significant share of charitable donations would probably still be made. Therefore, allowing taxpayers to deduct contributions is economically inefficient because it results in a large loss of federal revenue for a very small increase in charitable giving. For taxpayers who contribute more than 2 percent of their AGI to charity, this option would maintain the current incentive to donate but at much less cost to the federal government. People who make large donations often are more responsive to that tax incentive than people who make small contributions. Moreover, deductions of smaller contributions are more likely to be fraudulent because donations that are less than $250 do not require the same degree of documentation as those that are larger.

A potential disadvantage of this option is that total charitable giving would decline, albeit by only a small amount, JCT and the Congressional Budget Office estimate. People who contribute less than 2 percent of their AGI would no longer have a tax incentive to donate, and many of them could reduce their contributions. Although people who make larger donations would still have an incentive to give, they would have slightly lower after-tax income because of the smaller deduction and thus might reduce their contributions as well (although by a lesser percentage than people making smaller donations). Another effect of creating the 2 percent floor is that it would encourage taxpayers who had planned to make gifts over several years to combine donations into a single tax year to qualify for the deduction. As a result, some taxpayers would devote more resources to tax planning than they otherwise would have in an effort to best time their contributions and thereby minimize the amount of taxes they owe over a multiyear period.