Economic Perspective: Tax Deductions and Charitable Donations
“Today’s program looks at tax reform and charitable deductions. Mike, the ability of individuals to deduct charitable donations on their federal taxes may be affected by changes to the tax code Congress is expected to debate this year. What are the possible outcomes and impacts?”
“Well Congress can do several things that would impact charitable deductions. One: they could raise the raise the standard deduction. Now the standard deduction is the amount of money you can take off from your taxable income and not pay taxes on. If your standard deduction is higher than your deductions, which would include your charitable deductions, then you would take it rather than worry about those charitable and other deductions.”
“So an increase in the standard deduction would make charitable deductions less valuable. The second thing Congress could do is to lower the tax rate. Now everyone would say, ‘Oh that’s great. Lower tax rate.’ Again though, the value of a charitable deduction would go down if the tax rate goes down because you simply wouldn’t save as much money. A lot of people think a charitable deduction reduces your taxes dollar for dollar, but it reduces it based on your tax rate. So if tax rates are lower, charitable deductions are worth less.”
“And another thing Congress could do is limit the standard deduction, the dollar amount, for higher income people. Now all these things have, obviously, the charities worried. That makes sense, and they are going to have to pay close attention if Congress moves on these actions. Some estimates suggest that any of these changes could reduce the total amount of charitable deductions by around five percent.”
Walden is a William Neal Reynolds Distinguished Professor and Extension Economist in
the Department of Agricultural and Resource Economics at North Carolina State University who
teaches and writes on personal finance, economic outlook, and public policy.