Tax Treatment Of Charitable Contributions Research Articles

Charitable Contributions of Services

This Article examines the tax treatment of charitable contributions and concludes that contributors who do not itemize their deductions (nonitemizers) should contribute their services to charity whenever possible rather than contributing cash or property. Charitable donees similarly should embrace opportunities to accept and utilize service contributions from their donor bases, give service contributions as much recognition as money or property contributions, and encourage their lower-income donors to render services rather than giving money earned with performance of services. The Article suggests that nonitemizing taxpayers are the donors who have the most “skin in the game” for charitable contributions in terms of sacrifice. Promoting service rather than money or property contributions maximizes the tax subsidy of the charitable contributions. From the perspective of efficient tax planning for low and moderate-income taxpayers, the tradition of volunteerism in the United States is compelling. Yet, despite the ability to get more “bang for the buck” from service contributions, many charitable organizations that used to rely on volunteers for support increasingly have shifted their operations to reliance on paid staff and pushed even the low-income members of their donor base to contribute money rather than volunteer services.

Federal Income Tax Treatment of Charitable Contributions Entitling Donor to a State Tax Credit

This paper summarizes the current federal income tax treatment of charitable contributions where the gift entitles the donor to a state tax credit. Such credits are very common and are used by the states to encourage private donations to a wide range of activities, including natural resource preservation through conservation easements, private school tuition scholarship programs, financial aid for college-bound children from low-income households, shelters for victims of domestic violence, and numerous other state-supported programs. Under these programs, taxpayers receive tax credits for donations to governments, government-created funds, and nonprofits. A central federal income tax question raised by these donations is whether the donor must reduce the amount of the charitable contribution deduction claimed on her federal income tax return by the value of state tax benefits generated by the gift. Under current law, expressed through both court opinions and rulings from the Internal Revenue Service, the amount of the donor’s charitable contribution deduction is not reduced by the value of state tax benefits. The effect of this Deduction is that a taxpayer can reduce her state tax liability by making a charitable contribution that is deductible on her federal income tax return. In a tax system where both charitable contributions and state/local taxes are deductible, the ability to reduce state tax liabilities via charitable contributions confers no particular federal tax advantage. However, in a tax system where charitable contributions are deductible but state/local taxes are not, it may be possible for states to provide their residents a means of preserving the effects of a state/local tax deduction, at least in part, by granting a charitable tax credit for federally deductible gifts, including gifts to the state or one of its political subdivisions. In light of recent federal legislation further limiting the deductibility of state and local taxes, states may expand their use of charitable tax credits in this manner, focusing new attention on the legal underpinnings of the Full Deduction Rule. The Full Deduction Rule has been applied to credits that completely offset the pre-tax cost of the contribution. In most cases, however, the state credits offset less than 100% of the cost. We believe that, at least in this latter and more typical set of cases, the Full Deduction Rule represents a correct and long-standing trans-substantive principle of federal tax law. According to judicial and administrative pronouncements issued over several decades, nonrefundable state tax credits are treated as a reduction or potential reduction of the credit recipient’s state tax liability rather than as a receipt of money, property, contribution to capital, or other item of gross income. The Full Deduction Rule is also supported by a host of policy considerations, including federal respect for state initiatives and allocation of tax liabilities, and near-insuperable administrative burdens posed by alternative rules. It is possible to devise alternatives to the Full Deduction Rule that would require donors to reduce the amount of their charitable contribution deductions by some or all of the federal, state, or local tax benefits generated by making a gift. Whether those alternatives could be accomplished administratively or would require legislation depends on the details of any such proposal. We believe that Congress is best situated to balance the many competing interests that changes to current law would necessarily implicate. We also caution Congress that a legislative override of the Full Deduction Rule would raise significant administrability concerns and would implicate important federalism values. Congress should tread carefully if it seeks to alter the Full Deduction Rule by statute.

Charitable Contributions and the Personal Income Tax: Evaluating the Canadian Credit

The last fifteen years have witnessed significant changes in the way that charitable contributions by individuals are treated under the Canadian Income Tax Act. The most significant of these changes involves the conversion in 1988 of what had previously been a deduction for charitable contributions whereby the value of the tax benefit depends on the donor?s level of income, into a tax credit under which the value of this benefit depends on the total amount of charitable contributions claimed in the particular taxation year. As a result of this amendment, Canada has become the only developed country that recognizes charitable contributions by individuals in the form of a tax credit rather than a deduction. This paper evaluates the merits of this policy change and the structure of the Canadian charitable contributions tax credit in light of alternative possible rationales for the recognition of these gifts in computing the amount of tax payable under an income tax. Part II reviews the history of Canadian income tax provisions regarding charitable contributions by individuals and explains the structure of the current tax credit and related provisions governing the tax treatment of charitable contributions by individuals. Part III examines alternative rationales and related tax designs for the recognition of these charitable gifts in computing the amount of tax payable under an income tax, rejecting the views that recognition is necessary to define income or reward altruism, but accepting the arguments that tax assistance may have a useful role to play to promote pluralism by encouraging donations. Part IV offers conclusions.

Charitable Contributions of Time and Money: A Multivariate Sample Selection Approach

In this paper, we estimate a sample-selection system of equations in a joint analysis of volunteering, religious giving, and secular giving using data on working households from the 2005 Center on Philanthropy Panel Study and Panel Study on Income Dynamics. Estimated tax price elasticities suggest that changes in the tax treatment of charitable contributions could lead to substantial reductions in monetary donations. For example, replacing the deduction with a 12 percent tax credit available to all tax filers in 2005 would have increased religious and secular contributions from working households by 7.7 and 3.8 percent, respectively.

THE IMPACT OF TAX PRICE CHANGES ON CHARITABLE CONTRIBUTIONS TO THE NEEDY

Eliminating or reducing the federal charitable deduction can have serious impacts on the level of charitable donations. Tax price elasticity estimates from a multivariate sample selection model indicate that changing the deduction to a 12% tax credit would have reduced individual donations in 2012 by 18.9% if applied to itemizing taxpayers and by 10.5% if extended to nonitemizers. Elimination of the deduction would have led to a 35% reduction in individual charitable donations. Even if coupled with cuts in marginal tax rates, eliminating the charitable deduction will still likely result in substantial reductions given the inelastic income elasticities of charitable donations. The estimates justify the ardent opposition of many in the nonprofit sector to the more radical proposals for changing the tax treatment of charitable contributions. (JEL D34, C34)

The Market for Charitable Giving

Through good and bad economic times, charitable gifts have continued to roll in largely unabated over the past half century. In a typical year, total charitable gifts of money now exceed 2 percent of gross domestic product. Moreover, charitable giving has nearly doubled in real terms since 1990, and the number of nonprofit organizations registered with the IRS grew by nearly 60 percent from 1995 to 2005. This study provides a perspective on the economic interplay of three types of actors: donors, charitable organizations, and government. How much is given annually? Who gives? Who are the recipients of these gifts? Would changes in the tax treatment of charitable contributions lead to more or less giving? How can charitable institutions design mechanisms to generate the greatest level of gifts? What about the effectiveness of seed money and matching grants?

Floors, Ceilings, and Opening the Door for a Non-ltemizer Deduction

Proposals to reform the tax treatment of charitable contributions would extend the charitable deduction to non-itemizers and impose a floor under the charitable deduction of all taxpayers. This pap...

Tax Treatment of Charitable Contributions in Canada: Theory, Practice, and Reform

Tax Treatment of Charitable Contributions in Canada: Theory, Practice, and Reform

Tax Treatment of Charitable Contributions in Canada: Theory, Practice and Reform

Tax recognition for charitable contributions in Canada takes the form of a deduction where the contribution is made by a corporation or for the purpose of gaining or producing income from a business, a nonrefundable credit where individuals make qualifying gifts to eligible recipients, and a reduction or exemption from capital gains tax on gifts to eligible recipients of qualifying cultural property, publicly traded securities, or ecologically sensitive land. This article reviews different rationales for the tax recognition of charitable contributions, concluding that the most persuasive rationale is to indirectly subsidize the quasi-public goods and services that charities provide and the social and cultural pluralism that they advance. The article goes on to evaluate current rules by reference to these rationales for tax recognition and makes specific proposals for reforming Canadian tax rules in light of this evaluation.

The Income Tax and Charitable Contributions

Charitable contributions are an important source of basic finance for a wide variety of private nonprofit organizations that perform quasi-public functions. The tax treatment of charitable contributions substantially influences the volume and distribution of these gifts. The current study presents new estimates of the price and income elasticities of charitable giving. The parameter estimates are then used with the United States Treasury Tax File to simulate the effects of several possible alternatives to the current tax treatment of charitable giving. INDIVIDUAL CHARITABLE CONTRIBUTIONS are an important source of basic finance for a wide variety of private nonprofit organizations. Higher education, research, health care, the visual and performing arts, welfare services, and community and religious activities rely heavily on the voluntary institution. In 1970, American families contributed more than $17 billion for their support. The volume and distribution of charitable gifts is influenced by the personal income tax treatment of charitable contributions. There are today a number of widely discussed proposals for changing these rules. The appropriate tax treatment of such gifts involves a complex series of economic issues. Critical to a resolution of these issues is an understanding of the likely quantitative effects of alternative tax rules: the effects on the total volume of charitable gifts and its distribution among the different types of donees; the effects on the distribution of tax burdens

Tax incentives and charitable contributions in the United States: A microeconometric analysis

The American public sector relies substantially more on private nonprofit institutions than is common in most other countries. Higher education, health care, the visual and performing arts, and general community services are produced by voluntary institutions. Even when these institutions receive most of their income from user charges and public funds, they depend on private contributions to provide the basic ‘equity capital’ and to support new ventures.’ The federal income tax law allows the value of contributions to be deducted in calculating taxable income. The ‘price’ of one dollar’s contribution to a philanthropic organization, measured in terms of foregone income after tax, therefore varies inversely with the individual’s marginal tax rate. There are today a number of widely discussed proposals for changing the tax treatment of charitable contributions. These include the complete abolition of the deduction, the substitution of a system of tax credits, the,introduction of a ‘floor’ with a deduction or credit only for contributions above that level, and various modifi-