US CBO Studies Changes in Tax Treatment of Charitable Contributions

The U.S. Congressional Budget Office (“CBO”) recently published an economic analysis of options for changing how charitable contributions for purposes of federal income taxes. CBO, Options for Changing the Tax Treatment of Charitable Giving (2011). Currently, under Section 170 of the Internal Revenue Code (“IRC”), taxpayers who itemize deductions on their federal income tax returns can from their income—and thereby reduce their tax liability—donations to charities exempt from taxation under IRC Section 501(c)(3). Deductions for cash donations to such organizations may not exceed 50 percent of a taxpayer’s adjusted gross income.

Motivated by concerns regarding what the CBO described as the “cost to the government of subsidizing charitable contributions,” the agency explored multiple variations on four themes: (1) retaining the current deduction for itemizers but adding a floor; (2) allowing all taxpayers to claim the deduction, with or without a floor; (3) replacing the deduction with a nonrefundable credit for all taxpayers, equal to 25 percent of a taxpayer’s charitable donations, with or without a floor; (4) replacing the deduction with a nonrefundable credit for all taxpayers, equal to 15 percent of a taxpayer’s charitable donations, with or without a floor. According to the CBO’s estimates, adding a contribution floor to any of these options would reduce both the total cost to the government and the total amount donated to charity, relative to the same option without a floor. However, the analysis concluded that certain combinations of features—such as combining a deduction for all taxpayers (including those who do not currently itemize deductions) with a floor—could both increase donations and decrease the tax subsidy.

The CBO’s report, which takes into account the likely impacts of different policy options on various income groups, makes interesting reading for anyone in the U.S. nonprofit world. As the federal government scrutinizes the national economy in search of additional sources of tax revenue, the CBO’s analysis provides clues as to how Congress may change U.S. policy as it relates to nonprofits.

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