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Is the Charitable Deduction at Risk?

The United States, which has long been known as one of the most charitable nations in the world, has strengthened its reputation for charitable giving and now ranks first in the one-year and five-year World Giving Index (1).

As Americans we deducted $27 billion more in charitable contributions than we did real estate taxes (2). Our spirit of generosity is even more compelling when you consider it within the context that most Americans regard homeownership among their highest ambitions (3).

Why then, are charitable deductions potentially at risk? Curbing charitable deductions enters the tax reform debate amongst the ever growing pressure to address government deficits. A large and growing federal debt has serious negative consequences as a result of the need for increased federal spending for interest payments and its resulting constraints upon our economic growth (4). In short, the charitable deduction reduces the tax revenue the federal government would otherwise collect from us.

Polls show Americans strongly oppose capping or cutting the deduction as a means of solving the debt crisis with 75% saying they value the deduction as it currently stands (5) and over 70% saying they oppose eliminating the charitable deduction (6).

While the effect of tax reforms can never be fully anticipated, studies suggest that the philanthropic impact could be dramatic (7). Economists point to studies that suggests donation behavior of high-income people, for whom charitable deductions are heavily skewed, is responsive to tax incentives. While tax savings is typically not the main philanthropic motivator, donors do expect their contributions to result in a tax deduction. Reduce the tax incentive and donations may drop by an amount equal to or greater than the estimated tax revenue (8).

What is at stake extends beyond the $200 billion plus that households give to charities annually in support of education, religion, arts, health and human services. Charitable contributions fund research, advance healthcare, and help those in need. An argument can be made that continuing or perhaps even increasing the deductibility of charitable contributions, which has been a part of the US tax code since 1917, is cost effective way of realizing both social and economic benefits.

The balance between the deficit and the deductibility of our charitable contributions is a delicate discussion. Imagine the collective impact that charities bestow on the nation of givers who set the standard for giving. Now imagine a nation without. What are your thoughts? Please feel free to call me at 262-522-7404 or email me at kreilly@waukeshabank.com.

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Copyright ©2015  Kristin Reilly - All Rights Reserved

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Sources
1. Charities Aid Foundation (2014) World Giving Index 2014: A global view of giving trends. Retrieved from https://www.cafonline.org/pdf/CAF_WGI2014_Report_1555AWEBFinal.pdf
2. The PEW Charitable Trusts (2014) The Distribution of Select Federal Tax Deductions and Credits Across the States. Retrieved from http://www.pewtrusts.org/en/multimedia/data-visualizations/2014/federal-tax-deductions-and-credits
3. Breen, Tom. (2013) The University of Connecticut/Hartford Courant Poll: Middle Class Dream Persists, Though Harder to Attain. Retrieved from http://today.uconn.edu/blog/2013/02/uconnhartford-courant-poll-middle-class-dream-persists-though-harder-to-attain/
4. CBO (2015) The Budget and Economic Outlook: 2015 to 2025. Retrieved from http://www.cbo.gov/sites/default/files/cbofiles/attachments/49892-Outlook2015.pdf
5. Dunham+Company study (Wilson Perkins Allen Opinion Research’s January 2013 Omnibus Study) (2013). Retrieved from. http://www.dunhamandcompany.com/2013/02/survey-shows-americans-want-charitable-deduction-protected.dpbs
6. Jones, Jeffrey M. (2011) Americans Oppose Eliminating Income Tax Deductions. Retrieved from http://www.gallup.com/poll/147125/Americans-Oppose-Eliminating-Income-Tax-Deductions.aspx
7. Husock, Howard. Manhattan Institute Report (2013) Tax Reform and the Charitable Deduction: The Risk to Blue-State Philanthropy. Retrieved from http://today.uconn.edu/blog/2013/02/uconnhartford-courant-poll-middle-class-dream-persists-though-harder-to-attain/
8. Bakija, Jon. (2013) Tax Policy and Philanthropy: A Primer on the Empirical Evidence for the United States and Its Implications. Retrieved from http://web.williams.edu/Economics/wp/Bakija-Tax-Policy-and-Philanthropy-Primer.pdf