The Weird Relationship Between Charity and Tax Deductions

Charitable giving means supporting causes you care about. It means making the world a better place. It means “giving back” (quibble with the phrase if you like).

Then, twice a year, generally around tax time and in the very last week of the calendar year, giving takes on another meaning – tax savings.

Historically, though, such tax savings truly only mattered for about one-third of taxpayers. These were the ones who itemized their taxes instead of taking the standard deduction.

The 2017 tax law raised the standard deduction significantly, to $12,000 for an individual filer. The net effect of that is that even fewer folks will file itemized tax returns this year and moving forward. Among the AF readership, the percentage taking the standard deduction this year will be pretty high.

Given that, does the tax piece even matter when it comes to giving? Or, a more dangerous question, if there’s no deduction, should a person even give?

I’ve always firmly believed that people don’t give to charity because of the tax deduction. Instead, the tax deduction serves to help some people give more than they otherwise might. Still, it’s a controversial topic in some spheres. Here’s a quick Q&A about taxes, giving, why you might care, and why you shouldn’t.

Does the tax deduction drive giving?

Happily, people don’t give to charity simply because they save a few cents per dollar given. We know this because more than two-thirds of Americans report having given to charity – far more than have a tax reason to do so.

We also know that philanthropy takes many forms. Giving trends among younger givers steer more broadly than just traditional non-profits. We see more and more giving each year to giving vehicles without any tax benefits. These include such as crowdfunding, impact investing, and small-dollar cash donations (consider the more than $140 million that donors give to Salvation Army red kettles over the holidays).

Why do we have a tax deduction for charitable giving anyway?

That’s not a new question. In 1917, with World War I raging and America about to enter the fight, lawmakers argued over whether it made sense to be “losing” money to the charitable deduction. Americans will still give to charity anyway, right?

The pro-deduction side argued that encouraging philanthropy mattered a great deal to countless organizations that fed civic life in this country. People might give anyway, but could they be encouraged to give more?

Advocates for the deduction carried the day, and the charitable deduction continues to be a nice benefit for those who itemize their taxes.

Doesn’t the tax deduction cost the government money?

Big-government advocates will argue that tax deductions for charitable giving “take” from government. However, the more the private sector does, the less government feels compelled to do. The credit taxpayers receive for their charitable giving is simply letting government off the hook for solving every social ill.

Charitable giving doesn’t “take” from government – it frees government to focus on fewer things.

If we want more people to give, why do only itemizers get a benefit?

To encourage more giving, some charitable advocates have called for a wholesale change to the way we credit philanthropy. Instead of a “below the line” charitable deduction available only to itemizers, they propose an “above the line” charitable tax credit that every filer can use.

Congressman Danny Davis (D-IL) proposed a universal charitable tax credit in a recent bill. It’s very similar to another recent proposal from Reps. Henry Cuellar (D-TX) and Chris Smith (R-NJ). It is not yet clear whether either of these bills will become a reality.

If this idea does come about, groups such as the Tax Foundation believe the net effect will be more giving. It will also come at a “cost” to government because more people will write off their contributions than currently can. Conversely, that cost should also equate to more private resources to the food banks, churches, think tanks, and education groups that will use those resources to improve our communities.

Wouldn’t an individualist argue that charitable giving doesn’t make sense without getting something in return, like a tax deduction?

If we want to look at giving strictly from a self-interested perspective, we aren’t going to find the reasons to give in the tax deduction. Getting a quarter back on your tax return for a dollar given to charity is not a wealth-creation strategy. It’s just a nice perk.

The real benefits to giving are – surprise surprise – not doled out by the federal government, and they go beyond “merely” making the world better.

Take this fact: givers earn more. I know it sounds crazy, but it’s true. Arthur Brooks, scholar and outgoing president of the American Enterprise Institute, cites research that shows, even when you control for education, age, race, and all other variables, a dollar given to charity earned you an extra $4.35 in extra income, with most of that attributable to the charitable gift.

Put another way: The more you earn, the more you give, but also the more you give, the more you earn.

Arthur Brooks and other researchers have also found that, whether giving time or money, there is a causal link between charitable giving and increased happiness.

The simple act of donating money makes us feel like we are richer, to the point that being a giver had the same impact on happiness as doubling your income. So even if you don’t earn more, you’ll still better off, because giving makes you happier.

Tax deductions are nice. They are also impermanent, subject to the whims of Congress. If a deduction is on offer, snag it. However, if moving the needle toward a better world is at hand, which it is even with small donations, definitely jump on that. It’ll help you more in the long run.