Tax Issues Relating to Charitable Contributions and Organizations

The federal government supports the charitable sector by providing charitable organizations and donors with favorable tax treatment. Individuals itemizing deductions may claim a tax deduction for charitable contributions. Estates can make charitable bequests. Corporations can deduct charitable contributions before computing income taxes. Further, earnings on funds held by charitable organizations and used for a related charitable purpose are exempt from tax. In FY2019, projected tax subsidies for charities, not including the value of the tax exemption on earnings of charities or the estate tax deduction, totaled $51.6 billion. If investment income of nonprofits were taxed at the 35% corporate tax rate in 2016, revenue collected is estimated at $31.3 billion (this amount excludes religious organizations). The cost of deducting bequests on estates is estimated at $5 billion to $8 billion. Charitable organizations include both operating charities (including religious institutions) and organizations that tend to hold assets and make grants to operating charities, most notably private foundations, but also donor-advised funds (DAFs) and supporting organizations. The tax code treats different types of organizations differently. For example, foundations and certain supporting organizations have minimum payout requirements, while DAFs do not. Limits on charitable giving also differ across gifts to different types of organizations. Changes in the tax revision enacted in late 2017, popularly known as the Tax Cut and Jobs Act (TCJA; P.L. 115-97), while not generally aimed at charitable deductions, reduced the scope of the tax benefit for charitable giving. A higher standard deduction and the limit on the deduction for state and local taxes caused more individuals to take the standard deduction, as opposed to itemizing deductions. As a result, many individuals who were able to deduct charitable contributions no longer claim this itemized deduction. Other changes exempted more estates from the estate tax, eliminating the benefit of deducting charitable contributions in these cases. Concerns have arisen that these changes are expected to lead to a reduction in charitable contributions. In 2019, charitable contributions were estimated at $449.6 billion, or 2.1% of gross domestic product (GDP). Charitable gifts come from four sources: individual contributions (accounting for 68.9%), foundations (accounting for 16.8%), bequests (accounting for 9.6%), and corporations (accounting for 4.7%). In 2018, estimates suggest approximately 54% of individual contributions are expected to have received a tax subsidy. Aggregate data on giving shows a decline between 2017 and 2018 and 2019, which could reflect the effects of the TCJA, but the effect appears small when compared to historical fluctuations in giving as a share of GDP. A number of policy options could be considered with respect to the tax treatment of charitable giving or the tax treatment of charitable entities. The charitable deduction could be modified in ways that could extend charitable giving incentives to taxpayers not itemizing deductions, or with the intent of making charitable giving tax incentives more effective (inducing more giving for each dollar of lost federal tax revenue). There are also options related to the type of treatment of certain types of gifts, such as appreciated property or charitable miles driven. Some proposals have also been made to address concerns about aspects of certain charitable organizations, such as payouts by DAFs and university endowments. Some proposals would reverse certain changes made by the 2017 tax revision to the unrelated business income tax (UBIT) or impose administrative reforms.