The recent political struggle to resolve the fiscal cliff issue has highlighted the desperate search for revenue by the U.S. government. The possibility of major tax increases and the removal of cherished tax deductions remain on the table with the current administration, and one of the key deductions that may be up for either reduction or elimination is for charitable giving.
Taxpayers who itemize their deductions can take a deduction for any amount of cash or property that they donate to a qualified charity, also known as acharitable contribution deduction. Although there are some limits to this deduction that eventually kick in for wealthy taxpayers, the lower and middle classes have been able to reduce their tax bills for years with donations to worthy causes.
The American public has donated an average of $300 billion to various charities, annually, in recent years and about 40 million filers are able to claim this deduction each year. This equates to hundreds of billions of dollars in lost tax revenue for Uncle Sam.
A Double-Edged Sword
Republicans have offered a proposal that either caps or eliminates itemized deductions for the wealthy, which would include charitable contributions. They argue that this plan would generate an additional $800 billion in tax revenue over the next 10 years. The White House also suggested reducing the charitable deduction for wealthy taxpayers. However, many major charities are staunchly opposed to this idea, stating that the removal of the charitable tax deduction would drastically reduce the amount of contributions that they receive. Obama initially proposed this idea a few years ago, but several dozen charities have united to fight the President on this.
Why Do People Give?
Of course, one of the key issues that lie at the heart of this matter is the real reason why people give. There seems to be a fair amount of conflicting information about this issue; some studies and research seem to indicate that the tax deduction is a major reason why people give, while other polls do not reflect this as much. In fact, some fundraising experts have stated that their data and experience show that tax incentives are at the bottom of the list of reasons of why people give to charities.
They cite that the main reasons that people in the lower and middle classes who give are due to personal or religious conviction, a desire to help others, and in some cases a desire to give back to a charity that helped them in some way. But those who oppose curtailing this deduction claim that even if it does not serve as the primary motivation for the charitably inclined, it is nonetheless a key factor that motivates many donors to be more generous. The question then becomes how much of an impact will a reduction in this incentive have on the amount of donations made each year, and there is no clear answer to this.
Another key factor that proponents of eliminating this deduction cite is that reduced contributions will not really force most charities to close down; it will only make them reduce their overhead and operate in a more efficient and streamlined fashion. They point out that charitable giving has remained steady at about 2% of the total GDP over time, regardless of the amount that taxpayers have been able to deduct on their returns.
They also feel that retaining this incentive will only force the government to raise taxes in other areas where it will do more economic damage, and that those who are getting the most out of this deduction are those who need it least. Wealthy taxpayers have reaped just over 80% of the total amount deducted by American taxpayers for charitable contributions and many of them might do this primarily for public recognition or other self-serving reasons, rather than because of the tax savings. Of course, this isn't the case for everyone.
The Bottom Line
The possible impact of reducing or eliminating the deduction for charitable contributions in our tax code is a complex topic that encompasses many different factors. Charities, the U.S. government and the American public all have varying motivations in this matter, and the hard data that is available does not provide any definitive conclusions. Only time will tell how and whether this incentive will survive, and for whom it will be available. For more information on charitable tax deductions, as well as other tax breaks anyone can claim, consult your tax advisor or financial counselor.
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