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Charities lobbying to restore expanded tax deduction for giving

Temporary expansions meant to help charities stay afloat during the COVID-19 crisis expired at the end of the year

Rep. Chris Pappas is the lead sponsor of House legislation backed by nonprofits.
Rep. Chris Pappas is the lead sponsor of House legislation backed by nonprofits. (Caroline Brehman/CQ Roll Call file photo)

Nonprofits are urging lawmakers to restore more generous tax breaks for charitable giving as they consider a fresh round of pandemic aid with the omicron variant caseload still at worrying levels.

After temporary expansions meant to help charities stay afloat during the COVID-19 crisis expired at the end of the year, advocates are hoping for a revival.

The first round of coronavirus aid in March 2020 widened eligibility for charitable deductions beyond those who itemize on their returns, a pool of taxpayers that shrank considerably after the 2017 tax law doubled the standard deduction while limiting itemized deductions for state and local taxes, mortgage interest and more.

The March 2020 law allowed an “above the line” deduction of up to $300 for charitable giving in 2020, meaning that the almost 90 percent of taxpayers who take the standard deduction had a new incentive to give. Then in a year-end 2020 law renewing many tax relief provisions, policymakers extended that above-the-line deduction for another year and doubled it for married couples filing jointly, allowing them to deduct up to $600.

David L. Thompson, vice president of public policy for the National Council of Nonprofits, said the group will be pressing lawmakers to bring back the incentive as part of any new pandemic aid and to make it more generous. The Council has a network of more than 25,000 organizations.

Thompson said the tax break effectively promoted giving during the pandemic but that it needs to be in place as soon as possible to have an impact in the face of surging cases and restrictions. The incentive won’t work retroactively because people don’t give extra holding out hope for a tax break, he said.

“The tax incentives do work,” Thompson said. “Right now more is needed.”

There’s also a group dedicated to lobbying on the charitable deduction, the Charitable Giving Coalition, which counts some of the country’s biggest charities among members. The group sent a letter signed by more than 370 organizations to lawmakers in mid-December calling for the above-the-line deduction to be extended before it expired and arguing that nonprofits continue to play a critical role in the pandemic response and recovery.

There’s already interest on both sides of the aisle in bigger breaks for giving to public charities, foundations, religious organizations and other nonprofit organizations. A bill led by Chris Pappas, D-N.H., in the House and James Lankford, R-Okla., in the Senate would allow above-the-line deductions worth up to one-third of the standard deduction a taxpayer took for 2021 and 2022.

The standard deduction for the 2022 tax year is $12,950 for single filers, up $400 from the prior year due to an inflation adjustment, and for married couples it rises to $25,900, up $800 from 2021. That means under the Pappas-Lankford bill, joint filers could deduct more than $8,600 on their 2022 returns and individuals’ deduction would be worth more than $4,300.

That expansion would cost the government substantially more in lost tax revenue than the provision that lapsed after December. The Joint Committee on Taxation estimated that provision cost nearly $2.9 billion for 2021.

The National Council of Nonprofits and members are also preparing to press Congress to bring back a higher cap on individual donations for those who itemize their deductions.

The first two rounds of pandemic aid boosted the deduction for itemizers, allowing giving worth up to 100 percent of adjusted gross income to be written off. At the end of the year, the limit reverted to up to 60 percent, depending on the type of contribution and recipient. Higher limits on corporate giving also lapsed on Jan. 1. The JCT estimated the 2021 extension of those breaks would cost $643 million.

Fluctuating incentives

Incentives for donations to charity have been in flux in recent years. In addition to the 2017 tax law’s changes to deductions, the measure also cut income tax rates across the board, which makes deductions less valuable since their benefit depends on how much tax someone would pay on a chunk of income.

Charitable giving fell the year after the law’s passage, slipping by 1.7 percent in 2018 when adjusted for inflation, according to Giving USA, which tracks philanthropic contributions. But giving rebounded in 2019, reaching the second-highest level on record when adjusted for inflation. Donations climbed again in 2020 by an inflation-adjusted 3.8 percent.

The tax law changes tended to affect charitable giving by low-to-middle income households more than the richest, since the latter’s incentives didn’t change that much after 2017.

The wealthiest taxpayers still mainly itemized their returns, due in part to continued availability of generous deductions for philanthropic giving. And the top income tax rate, applicable to households earning over a half-million dollars, was set at 37 percent — not far off from the prior 39.6 percent — which means for a $100 donation, they’d cut $37 from their tax bill. That’s as opposed to middle income households in the 22 percent bracket, for instance, who’d get a $22 break for the same $100 check.

The extra tax incentives for less wealthy households in prior rounds of pandemic relief worked, according to research cited by the Charitable Giving Coalition in its letter to lawmakers. In the fourth quarter of 2020, for example, small donations of up to $250 increased by more than 15 percent from the prior year, outpacing growth of larger donations. And donations totaling $300 — the exact amount of the above-the-line deduction allowed for 2020 — shot up by 28 percent, the coalition said.

“While we know there are many factors that contribute to increased donations, one contributing factor is likely the availability of the charitable deduction to nonitemizers,” the letter said.

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