DESCRIPTION AND ANALYSIS OF PRESENT LAW

AND PROPOSALS TO EXPAND

FEDERAL TAX INCENTIVES FOR CHARITABLE GIVING

Scheduled for a Hearing

before the

SENATE COMMITTEE ON FINANCE

on March 14, 2001

Prepared by 

the Staff of the

JOINT COMMITTEE ON TAXATION

JCX-13-01

March 13, 2001
(i)

CONTENTS

Page

INTRODUCTION................................................................................................................ 1

I. OVERVIEW OF PRESENT-LAW RULES RELATING TO THE TAX

TREATMENT OF CHARITABLE CONTRIBUTIONS TO TAX-EXEMPT

ORGANIZATIONS......................................................................................................... 2

A. Overview of Tax-Exempt Organizations .............................................................. 2

B. Federal Tax Treatment of Contributions to Charities............................................ 3

1. In general........................................................................................................ 3

2. Contribution limits.......................................................................................... 4

3. Contributions of food inventory...................................................................... 6

4. Charitable contributions from Individual Retirement Arrangements

(“IRAs”) ........................................................................................................... 6

II. DESCRIPTION OF PROPOSALS TO EXPAND THE FEDERAL TAX

BENEFITS FOR CHARITABLE GIVING................................................................ 7

A. President Bush’s Proposals.................................................................................. 7

B. S. 35, the Tax Cut With a Purpose Act of 2001 .................................................... 7

C. S. 37, the Good Samaritan Hunger Relief Tax Incentive Act................................ 8

D. S. 205 ................................................................................................................... 9

E. S. 298, the Giving Incentives for Taxpayers Act .................................................. 9

F. S. 312, the Tax Empowerment and Relief for Farmers and Fishermen

(“TERFF”) Act..................................................................................................... 10

G. S. 393, the Paul Coverdell Medical Research Investment Act of 2001 ................ 10

III. ANALYSIS OF THE EFFECT OF THE CHARITABLE CONTRIBUTION

DEDUCTION ON CHARITABLE GIVING............................................................. 12

A. Rationale for Tax Deduction for Charitable Contributions Contributions............. 12
(ii)

Page

B. Analysis of Proposals to Expand the Deduction for Charitable Contributions...... 14

C. Data on Levels of Charitable Contributions and Charitable Contribution

Deductions............................................................................................................ 16
1

INTRODUCTION

The Senate Committee on Finance has scheduled a hearing on issues relating to 

charitable giving for March 14, 2001.

This document,1 prepared by the staff of the Joint Committee on Taxation, contains an 

overview of the present-law rules relating to the Federal tax treatment of charitable contributions, 

descriptions of various proposals to increase the Federal tax incentives for charitable 

contributions, and an analysis of the issues relating to Federal tax incentives for charitable 

giving.

 

1

 This document may be cited as follows: Joint Committee on Taxation, Description and 

Analysis of Present Law and Proposals to Expand the Federal Tax Incentives for Charitable 

Giving (JCX-13-01), March 13, 2001.
2

I. OVERVIEW OF PRESENT-LAW RULES RELATING TO THE TAX 

TREATMENT OF CHARITABLE CONTRIBUTIONS

TO TAX-EXEMPT ORGANIZATIONS

A. Overview of Tax-Exempt Organizations

The nonprofit sector in the United States includes a wide variety of organizations, both 

charitable and non-charitable, that are recognized as exempt from tax under section 501(a) of the 

Internal Revenue Code (the “Code”). At present, 25 different types of nonprofit organizations 

qualify for tax-exempt status. These include certain title and real property holding companies 

(sec. 501(c)(2)), social welfare organizations (sec. 501(c)(4)), labor, agricultural or horticultural 

organizations (sec. 501(c)(5)), trade associations (sec. 501(c)(6)), social clubs (sec. 501(c)(7)), 

cemetery companies (sec. 501(c)(13)), and credit unions (sec. 501(c)(14)).2 Only organizations 

described in section 501(c)(3) of the Code are considered “charitable.”

Tax-exempt organizations described in section 501(c)(3)--generally referred to as 

charities -- must meet requirements that other section 501(c) organizations do not face. Charities 

must be organized and operated exclusively for religious, charitable, scientific, testing for public 

safety, literary, or educational purposes, or to foster international amateur sports competition, or 

for the prevention of cruelty to children or animals. No part of the net earnings of a charity may 

inure to the benefit of any private shareholder or individual. In addition, no substantial part of 

the activities of a charity may consist of carrying on propaganda, or otherwise attempting to 

influence legislation, and such organization may not participate in, or intervene in, any political 

campaign on behalf of (or in opposition to) any candidate for public office.

In exchange for meeting the more stringent requirements under section 501(c)(3), 

charities are entitled to certain Federal tax (and other) benefits not available to other tax-exempt 

entities. Within certain limitations, donors to charities are entitled to deduct their contributions 

for Federal income tax purposes (if they itemize their deductions) and for Federal estate and gift 

tax purposes. Charities also may use the proceeds of tax-exempt financing (discussed in more 

detail below) and are granted preferential postal rates. In contrast, contributions to other 

nongovernmental, tax-exempt organizations generally are not deductible and such organizations 

are eligible only for the exemption from Federal income tax. Charities and certain other taxexempt organizations may also qualify for exemption from State and local taxes.

Charities are further classified as either “public charities” or “private foundations.”3 

Private foundations are defined under section 509(a) as all organizations described in section 

501(c)(3) other than an organization granted public charity status by reason of (1) being a 

specified type of organization (i.e., churches, educational institutions, hospitals and certain other 

medical organizations, certain organizations providing assistance to colleges and universities, or 

 

2

 In addition, other Code sections provide general tax-exempt status for other entities, 

such as political organizations (sec. 527), qualified pension plans (secs. 401(a) and 501(a)), and 

certain cooperatives (sec. 521).

3

 Sec. 509(a).
3

a governmental unit); (2) receiving a substantial part of its support from governmental units or 

direct or indirect contributions from the general public; or (3) providing support to another 

section 501(c)(3) entity that is not a private foundation. In contrast to public charities, private 

foundations generally are funded from one or a limited number of sources (an individual, family, 

or corporation) and are subject to a number of restrictions not applicable to public charities.4 In 

general, more generous charitable contribution deduction rules apply to gifts made to public 

charities than the rules that apply to gifts made to private foundations.

Donors making contributions to other tax-exempt entities described in section 501(c) 

(i.e., non-charities) generally are not entitled to a deduction under section 170 for the 

contribution for Federal income, estate, or gift tax purposes, with the exception of certain gifts 

made to a veterans’ organization or a domestic fraternal society.5 Contributions to certain 

nonprofit cemetery companies are deductible for Federal income tax purposes, but generally are 

not deductible for Federal estate or gift tax purposes.6

Tax-exempt organizations generally are not subject to Federal income tax on dues and 

contributions the organization receives from its members, nor on income from activities that are 

substantially related to the purpose of the organization’s tax exemption. Tax-exempt 

organizations generally are not subject to Federal income tax on investment income, although 

this general rule does not apply to certain organizations (e.g., social clubs described in sec. 

501(c)(7), voluntary employees’ beneficiary associations described in sec. 501(c)(9), and 

political organizations described in sec. 527). If a tax-exempt organization engages in business 

activities unrelated to its exempt purpose, the organization may be subject to unrelated business 

income tax (“UBIT”).7

B. Federal Tax Treatment of Contributions to Charities

1. In general

In computing taxable income, a taxpayer who itemizes deductions generally is allowed to 

deduct the amount of cash and the fair market value of property contributed to a charity 

described in section 501(c)(3) or a Federal, State, or local governmental entity.8 9 The amount of 

 

4

 Secs. 4940-4945.

5

 Secs. 170(c)(3), 170(c)(4), 2055(a)(3), 2055(a)(4), 2106(a)(2)(A)(iii), 2522(a)(3), and 

2522(a)(4).

6

 Sec. 170(c)(5).

7

 Secs. 511-514.

8

 Sec. 170(a). The Economic Recovery Tax Act of 1981 adopted a temporary provision 

that permitted individual taxpayers who did not itemize income tax deductions to claim a 

deduction from gross income for a specified percentage of their charitable contributions. The 

maximum deduction was $25 for 1982 and 1983, $75 for 1984, $150 for 1985, and $300 for 

1986. The nonitemizer deduction terminated after 1986.
4

the deduction allowable for a taxable year with respect to a charitable contribution of property 

may be reduced depending on the type of property contributed, the type of charitable 

organization to which the property is contributed, and the income of the taxpayer.10

In the case of a charitable contribution of inventory or other ordinary-income or shortterm capital gain property, the amount of the deduction is limited to the taxpayer's basis in the 

property. In the case of a charitable contribution of tangible personal property, the deduction is 

limited to the taxpayer's basis in such property if the use by the recipient charitable organization 

is unrelated to the organization's tax-exempt purpose. In cases involving contributions to a 

private foundation (other than certain private operating foundations), the amount of the 

deduction is limited to the taxpayer's basis in the property.11

A payment to a charity (regardless of whether it is termed a "contribution") in exchange 

for which the donor receives an economic benefit is not deductible, except to the extent that the 

donor can demonstrate that the payment exceeds the fair market value of the benefit received 

from the charity. To facilitate distinguishing charitable contributions from purchases of goods or 

services from charities, present law provides that no charitable contribution deduction is allowed 

for a separate contribution of $250 or more unless the donor obtains a contemporaneous written 

acknowledgement of the contribution from the charity indicating whether the charity provided 

any good or service (and an estimate of the value of any such good or service) to the taxpayer in 

consideration for the contribution.12 In addition, present law requires that any charity that 

receives a contribution exceeding $75 made partly as a gift and partly as consideration for goods 

or services furnished by the charity (a “quid pro quo” contribution) is required to inform the 

contributor in writing of an estimate of the value of the goods or services furnished by the charity 

and that only the portion exceeding the value of the goods or services is deductible as a 

charitable contribution.13

2. Contribution limits

Individual taxpayers

Under present law, total deductible contributions of an individual taxpayer to public 

charities, private operating foundations, and certain types of private nonoperating foundations 

may not exceed 50 percent of the taxpayer’s contribution base, which is the taxpayer’s adjusted 

gross income (“AGI”) for a taxable year (disregarding any net operating loss carryback).14 To 

 

9

 The deduction is also allowed for purposes of calculating alternative minimum taxable 

income.

10 Secs. 170(b) and (e).

11 Sec. 170(e)(1)(B).

12 Sec. 170(f)(8).

13 Sec. 6115.

14

 Sec. 170(b)(1)(A).
5

the extent a taxpayer has not exceeded the 50-percent limitation, (1) contributions of capital gain 

property to public charities generally may be deducted up to 30 percent of the taxpayer’s 

contribution base, (2) contributions of cash to private foundations and certain other charitable 

organizations generally may be deducted up to 30 percent of the taxpayer’s contribution base, 

and (3) contributions of capital gain property to private foundations and certain other charitable 

organizations generally may be deducted up to 20 percent of the taxpayer’s contribution base.15

Contributions by individuals in excess of the 50-percent limit may be carried over and 

deducted over the next five taxable years, subject to the relevant percentage limitations on the 

deduction in each of those years.

In addition to the percentage limitations imposed specifically on charitable contributions, 

present law imposes a reduction on most itemized deductions, including charitable contribution 

deductions, for taxpayers with AGI in excess of a threshold amount, which is indexed annually 

for inflation.16 The threshold amount for 2001 is $132,950 ($66,475 for married individuals 

filing separate returns). For those deductions that are subject to the limit, the total amount of 

itemized deductions is reduced by 3 percent of AGI over the threshold amount, but not by more 

than 80 percent of itemized deductions subject to the limit. The effect of this reduction is to limit 

partially a taxpayer’s charitable contributions deduction.

Corporate taxpayers

Under present law, a corporation is allowed to deduct charitable contributions up to 10 

percent of the corporation’s modified taxable income for the year.17 For this purpose, taxable 

income is determined without regard to (1) the charitable contributions deduction, (2) any net 

operating loss carryback, (3) deductions for dividends received, (4) deductions for dividends paid 

on certain preferred stock of public utilities, and (5) any capital loss carryback for the taxable 

year.18 Any charitable contribution by a corporation that is not currently deductible because of 

the percentage limitation may be carried over for up to five taxable years.

A transfer of property by a business to a charity might qualify as either a charitable 

contribution or a deductible business expense, but not both. No deduction is allowed as a 

business expense under section 162 for any contribution that would be deductible as a charitable 

gift were it not for the percentage limitations on the charitable contributions deduction.19 

Likewise, a business transfer made with a reasonable expectation of financial return 

 

15 Sec. 170(b)(1)(B), (C), and (D).

16 Sec. 68.

17 The cap on corporate charitable contributions was increased from 5 percent to 10 

percent in the Economic Recovery Tax Act of 1981.

18 Sec. 170(b)(2).

19 Sec. 162(b).
6

commensurate with the amount of the transfer is not deductible as a charitable contribution, but 

may be deductible under section 162.

3. Contributions of food inventory

Under present law, a taxpayer’s deduction for charitable contributions of food inventory 

generally is limited to the taxpayer’s basis (typically, cost) in the inventory. However, certain 

corporations may claim a deduction in excess of basis for certain charitable contributions.20 This 

augmented deduction is equal to the lesser of (1) basis plus one-half of the item’s appreciated 

value (i.e., fair market value minus basis) or (2) two times basis. To be eligible for an enhanced 

deduction, the taxpayer must establish that the fair market value of the donated item exceeds 

basis. The valuation of food inventory has been the subject of ongoing disputes between 

taxpayers and the IRS. In one case, the Tax Court held that the value of surplus bread inventory 

donated to charity was the full retail price of the bread rather than half the retail price, as the IRS 

asserted.21

4. Charitable contributions from Individual Retirement Arrangements (“IRAs”)

Under present law, individuals may make deductible and nondeductible contributions to a 

traditional IRA. Amounts in a traditional IRA are includible in income when withdrawn (except 

to the extent the withdrawal represents a return of nondeductible contributions). Individuals may 

also make nondeductible contributions to a Roth IRA. Qualified withdrawals from a Roth IRA 

are excludable from gross income. Withdrawals from a Roth IRA that are not qualified 

withdrawals are includible in gross income to the extent attributable to earnings. Includible 

amounts withdrawn from a traditional IRA or a Roth IRA before attainment of age 59-1/2 are 

subject to an additional 10-percent early withdrawal tax, unless an exception applies.

If an amount withdrawn from a traditional IRA or a Roth IRA is donated to a charitable 

organization, the rules relating to the tax treatment of withdrawals from IRAs apply and the 

charitable contribution is subject to the normally applicable limitations on such contributions.

 

20 Sec. 170(e).

21

 Lucky Stores Inc. v. Commissioner, 105 T.C. 420 (1995).
7

II. DESCRIPTION OF PROPOSALS TO EXPAND THE FEDERAL TAX BENEFITS 

FOR CHARITABLE GIVING

A. President Bush’s Proposals

President Bush’s budget proposal includes three recommendations relating to the tax 

treatment of charitable contributions.22 A detailed description of the President’s 

recommendations has not yet been released. However, the President’s budget proposal includes 

the following three recommendations relating to the Federal tax treatment of charitable 

contributions:

(1) Expand the Federal charitable deduction to the 70 percent of taxpayers who do 

not itemize deductions;

(2) Permit charitable contributions from IRAs without penalty.

(3) Raise the cap on corporate charitable contributions; and

B. S. 35, the Tax Cut With a Purpose Act of 2001 (Sen. Gramm and others)

In general

Title VI of S. 35 contains proposals similar to the three proposals in the President’s 

budget. S. 35 would (1) permit a deduction for a portion of charitable contributions for 

individuals who do not itemize deductions, (2) permit tax-free distributions from IRAs for 

charitable purposes, and (3) raise the percentage limitation on corporate charitable contributions.

Charitable deduction for nonitemizers

Section 601 of S. 35 would phase in a deduction for charitable contributions for 

individuals who do not itemize their deductions. The amount of the deduction would be 

subtracted from AGI in the same manner as the standard deduction and the deduction for 

personal exemptions under present law.

Under the bill, the charitable contribution deduction for nonitemizers could not exceed 

the amount of the standard deduction for the taxable year and would be subject to the otherwise 

applicable percentage limitations on charitable contributions under section 170. Thus, the 

deduction would be available for contributions of cash and property, subject to the present-law 

rules. As with the present-law charitable contribution deduction, the deduction would be 

allowed in computing alternative minimum taxable income.

Effective date.--The deduction would apply for taxable years beginning after December 

31, 2001, and would be phased in over a five-year period. Thus, in 2002, an individual taxpayer 

 

22

 A Blueprint for New Beginnings, A Responsible Budget for America’s Priorities, U.S. 

Government Printing Office (February 2001).
8

could claim 20 percent of the deduction that would otherwise be allowable; in 2003, 40 percent; 

in 2004, 60 percent; in 2005, 80 percent; and in 2006 and thereafter, 100 percent.

The following example illustrates the operation of the phase in of the deduction. In 2002, 

a single taxpayer with AGI for the taxable year of $10,000 contributes $6,000 of cash to a public 

charity. The taxpayer does not itemize deductions. For 2002, the taxpayer’s charitable 

contribution deduction is 20 percent of the amount otherwise allowed under section 170 (up to 

the standard deduction). Under section 170, the taxpayer’s charitable contribution deduction is 

limited to 50 percent of the taxpayer’s contribution base (i.e., AGI). Thus, the deduction allowed 

for the taxable year under section 170 would be $5,000 (50 percent of $10,000). The projected 

standard deduction for 2002 is $4,650. Under the bill, the taxpayer’s charitable contribution 

deduction for 2002 would be $930 (20 percent of $4,650). Under section 170, the taxpayer 

would be entitled to carry over to the following five taxable years the portion of the charitable 

contribution that exceeds the taxpayer’s contribution base. Thus, the taxpayer would be entitled 

to carry over $1,000 to the following five taxable years.

IRA distributions for charitable purposes

Under section 602 of S. 35, an exclusion from gross income would be provided for 

otherwise taxable withdrawals from a traditional or Roth IRA that are “qualified charitable 

distributions.” A qualified charitable distribution would include any distribution from an IRA 

made on or after the date the IRA owner attains age 59-1/2 and made directly from the IRA to an 

organization to which a deductible charitable contribution may be made.

The amount of the charitable deduction to which an individual is entitled during a taxable 

year is reduced (but not below zero) by the qualified charitable distributions from an IRA during 

the year.

Effective date.--The proposal would be effective for taxable years beginning after 

December 31, 2001.

Corporate charitable contributions

Section 603 of S. 35 would increase the percentage limitation on the deduction for 

corporate charitable contributions from 10 to 15 percent.

Effective date.--The proposal would be effective for taxable years beginning after 

December 31, 2001.

C. S. 37, the Good Samaritan Hunger Relief Tax Incentive Act (Sen. Lugar and others)

S. 37 would amend the present-law charitable deduction contribution rules of section 170 

to (1) expand the class of taxpayers eligible to claim an augmented deduction for charitable 

contributions of food inventory, and (2) modify and clarify the determination of fair market 

value for such contributions.

Under the bill, any taxpayer, rather than only a C corporation, engaged in a trade or 

business would be eligible to claim an enhanced deduction for donations of food inventory under 
9

section 170(e). In addition, the bill would provide that the fair market value of donated food that 

cannot or will not be sold solely due to internal standards of the taxpayer, lack of market, or 

similar circumstances, would be determined without regard to such factors and, if applicable, by 

taking into account the price at which the same or similar food items are sold by the taxpayer at 

the time of the contribution or in the recent past.

Effective date.--The bill would be effective for taxable years beginning after December 

31, 2001.

D. S. 205 (Sen. Hutchison and others)

The proposal would provide an exclusion from gross income for otherwise taxable IRA 

withdrawals from a traditional or a Roth IRA for qualified charitable distributions made (1) to a 

charitable organization to which deductible contributions can be made; (2) to a charitable 

remainder annuity trust or charitable remainder unitrust; (3) to a pooled income fund (as defined 

in sec. 642(c)(5)); or (4) for the issuance of a charitable gift annuity. The exclusion would apply 

with respect to distributions described in (2), (3), or (4) only if no person holds an income 

interest in the trust, fund, or annuity attributable to such distributions other than the IRA owner, 

his or her spouse, or a charitable organization.

In determining the amount includible in gross income by reason of a payment from a 

charitable remainder annuity trust or charitable remainder unitrust to which a qualified charitable 

distribution from an IRA was made, the taxpayer would be required to treat as ordinary income 

(as described in sec. 664(b)(1)) the portion of the distribution from the IRA to the trust which 

would have been includible in income but for the proposal. Similarly, in determining the amount 

includible in gross income by reason of a payment from a charitable gift annuity purchased with 

a qualified charitable distribution from an IRA, the taxpayer would not be permitted to treat the 

portion of the distribution from the IRA used to purchase the annuity as an investment in the 

annuity contract.

A qualified charitable distribution would be treated as any distribution from an IRA 

which is made on or after the date the IRA owner attains age 59-1/2, and which is made directly 

to the charitable organization or to a charitable remainder annuity trust, charitable remainder 

unitrust, or charitable gift annuity (as described above).

The amount otherwise allowable as a deduction to the individual for the year as charitable 

contributions would be reduced by the amount of qualified charitable distributions.

Effective date.--The bill would be effective for taxable years beginning after the date of 

enactment.

E. S. 298, the Giving Incentives for Taxpayers Act (Sen. McConnell and others)

S. 298 would provide a charitable contribution deduction for individual taxpayers who do 

not itemize deductions. Under the bill, up to $500 of charitable contributions ($1,000 in the case 

of a married couple filing a joint return) that would otherwise be deductible contributions under 

section 170 could be deducted from AGI, in the same manner as the standard deduction and the 

deduction for personal exemptions under present law.
10

In addition, the bill would provide that, for purposes of the charitable contributions 

deduction under section 170, a taxpayer would be deemed to have made a charitable contribution 

on the last day of the taxable year if the contribution is paid on account of such taxable year and 

is paid no later than the due date of the return for such taxable year (not including extensions of 

time to file the return).

Effective date.--The bill would be effective for taxable years beginning after December 

31, 2000.

F. S. 312, the Tax Empowerment and Relief for Farmers and Fishermen

(“TERFF”) Act (Sen. Grassley and others)

Section 7 of S. 312 would amend the present-law charitable deduction contribution rules 

of section 170 to (1) expand the class of taxpayers eligible to claim an augmented deduction for 

charitable contributions of food inventory, and (2) modify and clarify the determination of fair 

market value for such contributions.

Under the bill, any taxpayer, rather than only a C corporation, engaged in a trade or 

business would be eligible to claim an enhanced deduction for donations of food inventory under 

section 170(e)(3). In addition, the bill would provide that the fair market value of donated food 

that cannot or will not be sold solely due to internal standards of the taxpayer, lack of market, or 

similar circumstances, would be determined without regard to such factors and, if applicable, by 

taking into account the price at which the same or similar food items are sold by the taxpayer at 

the time of the contribution or in the recent past.

Effective date.--The bill would be effective for taxable years beginning after December 

31, 2001.

G. S. 393, the Paul Coverdell Medical Research Investment Act of 2001

(Sen. Frist and others)

Sec. 2 of S. 393 would provide a special limitation under section 170(b) with respect to 

certain contributions for medical research. Under the bill, any medical research contributions 

would be allowed to the extent that the aggregate amount of such contributions does not exceed 

the lesser of (1) 80 percent of the taxpayer’s contribution base (as defined under present law) for 

the taxable year, or (2) the excess of 80 percent of the taxpayer’s contribution base over the 

amount of charitable contributions (other than contributions of capital gain property) otherwise 

allowable for the taxable year. Any medical research contributions that are not currently 

deductible because of the percentage limitation could be carried over for up to 10 taxable years.

Under the bill, a medical research contribution means a charitable contribution that is 

designated for the use of conducting medical research, to (1) an educational institution,23 (2) an 

organization the principal purpose or functions of which are the providing of medical or hospital 

care or medical education or medical research,24 (3) a governmental unit,25 or (4) a corporation, 

 

23 Sec. 170(b)(1)(A)(ii).

24 Sec. 170(b)(1)(A)(iii).
11

trust, or community chest, fund, or foundation organized for charitable purposes that normally 

receives a substantial part of its support from governments or from direct or indirect public 

contributions.26

Effective date.--The proposal would be effective for contributions made in taxable years 

beginning after December 31, 2001, and to contributions made on or before December 31, 2001, 

if a deduction would be allowed under section 170 for taxable years beginning after December 

31, 2000, if the proposal had applied to the contribution when made.

 

25 Sec. 170(b)(1)(A)(v).

26 Sec. 170(b)(1)(A)(vi).
12

III. ANALYSIS OF THE EFFECT OF THE CHARITABLE

CONTRIBUTION DEDUCTION ON CHARITABLE GIVING

A. Rationale for Tax Deduction for Charitable Donations

In general

Tax deductibility of charitable donations reduces the economic cost to the donor of his or 

her donation and, therefore, encourages charitable giving (see the discussion, below, concerning 

the economic effect of the charitable contribution deduction). There are a number of different 

rationales advanced for the deductibility of donations to charitable organizations. These 

rationales depend, in part, on differing views about the role of charitable organizations and the 

benefits they provide to society as a whole.

One rationale for the charitable contribution deduction is that income given to a charity 

should not be taxed because it does not enrich the giver. Or, stated differently, the charitable 

contribution reduces the taxpayer’s ability to pay income tax. A contrasting view would be that 

charitable giving is a purely personal expenditure, a deduction for which should be denied under 

a theoretically pure income tax system.

A second rationale for the deduction for charitable contributions relates to the view that 

charitable organizations are providing many services at little or no direct cost to taxpayers. It is 

argued that such services would otherwise have to be provided by the government at full cost to 

taxpayers. In this view, the tax deduction for voluntary charitable contributions is seen as 

equivalent to deductions permitted for many State and local taxes. The charitable contribution 

deduction can be said to provide neutrality in the choice to provide certain services to the public 

through direct government operation and financing or through the private operation and mixed 

private and public financing of a charitable organization.

A third rationale for the charitable contribution deduction is that many charitable 

organizations are public in nature or provide significant spillover benefits to the public at large. 

For example, some charitable organizations maintain open spaces such as bird refuges. Open 

space is an example of a public good, that is, a good or service that may be simultaneously 

enjoyed by all. Other charitable organizations provide benefits that improve the health of 

specific individuals, such as through the provision of vaccinations, which provide spillover 

benefits27 to the population in general. Economists generally argue that, in the absence of a 

subsidy, the private market may provide insufficient levels of public goods or goods that create 

spillover benefits.28 Thus, it is argued that the tax deduction for charitable contributions under 

 

27 Economists usually refer to such spillover benefits as “positive externalities,” which 

are benefits that accrue to the individual who consumes the good and also to other individuals 

who are “external” to the initial consumption of the good.

28 For example, see Musgrave, Richard A. and Musgrave, Peggy B., Public Finance in 

Theory and Practice (New York: McGraw Hill), 1984, and Rosen, Harvey S., Public Finance

(Homewood, IL: Irwin), 1988.
13

present law encourages donations to charities that provide public goods or significant spillover 

benefits and, therefore, promotes the provision of such benefits.

Effect of the standard deduction

The standard deduction provides a minimum exemption from income that many analysts 

view as providing relief to taxpayers who choose not to itemize their deductions, but who make 

charitable contributions, pay mortgage interest, or incur other expenses that are otherwise 

permitted as itemized deductions under the Code. Taxpayers generally will choose to itemize 

their deductions, rather than claim the standard deduction, if it is in their financial interest to do 

so.

Under this view, taxpayers who claim the standard deduction do not have total deductions 

that otherwise could be itemized in excess of the standard deduction amount. Thus, it could be 

argued that these taxpayers generally receive a tax benefit in excess of their actual expenses that 

would be deductible. From the perspective of those who see charitable contributions as reducing 

a taxpayer’s ability to pay or providing parity to taxes paid to State and local governments, the 

standard deduction minimizes administrative burdens while achieving roughly the same results 

as permitting the taxpayer to itemize deductions. Under this view, the standard deduction more 

than compensates an individual who makes a charitable contribution for the income that was 

foregone by the contribution.

However, from the perspective that a specific incentive is required to achieve an efficient 

level in the provision of public goods or goods that produce spillover benefits, the standard 

deduction is not a substitute for the itemized deduction for charitable contributions. The 

taxpayer receives the standard deduction irrespective of any charitable contributions that are 

made. Thus, to the extent that tax incentives for charitable giving increase charitable 

contributions, there is no incentive under present law for the 70 percent of taxpayers who do not 

itemize deductions to make charitable contributions.

Economic effects of tax deductions for charitable contributions

As with any tax deduction or credit, the price to the donor of charitable giving that 

benefits from a tax incentive is reduced by the value of the tax benefit provided. For example, 

for a taxpayer who itemizes deductions and is in the 31-percent tax bracket, a $100 cash gift to 

charity reduces the taxpayer’s taxable income by $100, and thereby reduces tax liability by $31. 

As a consequence, the $100 cash gift to charity reduces the taxpayer’s after-tax income by only 

$69. Economists would say that the price of giving $100 cash to charity is $69 for this taxpayer. 

As the preceding example shows, the price of giving is determined as one minus the taxpayer’s 

marginal tax rate. Alternatively stated, the value of the tax deduction is the amount deducted 

multiplied by the taxpayer’s marginal tax rate. Under present law, a taxpayer who does not 

itemize deductions receives no value from the tax deductibility of charitable contributions and 

the tax price of giving $1.00 is $1.00 of foregone other expenditures.

The charitable contribution deduction is worth more the higher the taxpayer’s marginal 

tax rate. Because higher-income taxpayers generally are in higher marginal tax rate brackets, the 

charitable contribution deduction under present law is generally more valuable to higher income 
14

taxpayers than to lower income taxpayers. As a result, under present law, higher income 

taxpayers generally have a lower tax price of giving than do lower income taxpayers. Lower 

income taxpayers are more likely to claim the standard deduction and, thereby, the tax price of 

their giving is $1.00 of foregone other expenditures per $1.00 of charitable contribution. 

Proposals to extend the charitable contribution deduction to nonitemizers would reduce the tax 

price of charitable contributions for this class of taxpayer.

While factors other than tax benefits also motivate charitable giving, the preponderance 

of evidence suggests that the charitable contribution deduction has been a stimulant to charitable 

giving, at least for higher income taxpayers. Economic studies generally have established that 

charitable giving responds to the price of giving. While the economic literature suggests that 

individuals alter their giving in response to changes in the price of giving, there is less consensus 

as to how large are the changes in donations induced by the tax deductibility of charitable 

contributions.29 In addition, most studies rely upon data relating to taxpayers who itemize 

deductions. Inferences drawn from such studies may be inappropriate when applied to taxpayers 

who currently claim the standard deduction. Some evidence suggests that higher-income 

taxpayers are more responsive to the incentives provided by the charitable contribution 

deduction.30

B. Analysis of Proposals to Expand the Deduction for Charitable Contributions

In general

If taxpayers respond positively to the incentive effect of the tax deduction for charitable 

contributions, then proposals to expand the charitable contribution deduction should lead to 

increases in the size of the charitable sector because increased availability of the tax deduction 

 

29 See, Clotfelter, Charles, Federal Tax Policy and Charitable Giving (Chicago: 

University of Chicago Press), 1985, for a review of the literature. Feldstein and Clotfelter argue 

that the deduction for charitable contributions induces charitable contributions in amounts 

exceeding the revenue lost to the government from the tax deduction. Feldstein, Martin and 

Clotfelter, Charles, “Tax Incentives and Charitable Contributions in the United States,” Journal 

of Political Economics, 5, 1976. More recently, Randolph argues the opposite. Randolph, 

William C., “Dynamic Income, Progressive Taxes, and the Timing of Charitable Contributions,” 

Journal of Political Economy, 103, August 1995, pp. 709-738. Randolph argues that earlier 

studies inadvertently confused timing effects that may be the result of an individual taxpayer’s 

circumstances in a particular year or the result of changes from one tax regime to another with 

the permanent effects. Randolph’s estimates suggest that, on a permanent basis, charitable 

contributions are much less responsive to the tax price than previously believed. Clotfelter, 

Charles T., “The Impact of Tax Reform on Charitable Giving: A 1989 Perspective,” in Slemrod, 

Joel, ed., Do Taxes Matter? The Impact of the Tax Reform Act of 1986 (Cambridge: MIT Press), 

1990, p. 228, points to the surge in giving in 1986 prior to enactment of the Tax Reform Act of 

1986 as evidence of the tax-sensitive timing of gifts.

30 See, Clotfelter, Charles, “The Impact of Tax Reform on Charitable Giving: A 1989 

Perspective.”
15

would lead to increased contributions to the charitable sector. Depending upon the magnitude of 

the additional or induced contributions, the increase in the size of the charitable sector may be 

less than, equal to, or greater than the tax revenue foregone. If the increase in contributions to 

the charitable sector induced by the increased deduction exceeds the revenue lost to the 

government, then the tax deduction could be said to be an efficient means of providing public 

support to such charitable functions.31

Opponents of proposals to expand the deduction for charitable contributions argue that 

many charitable contributions are not tax motivated, but would be made in any event for non-tax 

reasons. Accordingly, for such contributions, a tax deduction amounts to a windfall reduction in 

the taxpayer’s liability with no change in the taxpayer’s behavior.

Recordkeeping and compliance issues

In the past, concerns about the validity of charitable contribution deductions claimed by 

taxpayers led to legislation to require written substantiation and recordkeeping with respect to 

certain charitable contributions. Proposals to expand availability of the charitable contribution 

deduction may lead to increased concerns about whether taxpayers are claiming deductions for 

charitable contributions legitimately made. See the discussion in III.C., below, concerning 

studies of the extent to which taxpayers overstate their charitable contributions.

If the proposals to expand the deduction for charitable contributions apply to 

contributions of property, valuation issues may arise. Many contributions of property to charities 

do not have a readily ascertainable value and taxpayers may overstate the value of such property 

in order to increase the tax benefit of the charitable contribution deduction. For example, an 

increasing number of charities are soliciting donations of used automobiles by individual 

taxpayers. Absent an expert appraisal, determining the value of a particular used automobile 

may be difficult both for an individual and the Internal Revenue Service. Certain published 

guidelines are available as a reference for this purpose, but there is the possibility of a wide 

variation in valuation even using such published guides. Determining the value of property such 

as used clothing and appliances presents more difficult valuation issues. Valuation issues place 

administrative burdens on taxpayers, who are required to maintain records to substantiate their 

charitable contributions deductions, and the Internal Revenue Service.

It has been noted that one benefit of the present-law standard deduction is that it 

eliminates the need to itemize and maintain supporting documentation for deductions. Some will 

note that a substantial increase in the standard deduction was enacted as part of the Tax Reform 

Act of 1986, in part, because “[t]axpayers who will use the standard deduction rather than 

itemize their deductions will be freed from much of the recordkeeping, paperwork, and 

 

31 In the empirical economics literature, the notion of elasticity is used as a measure of 

taxpayer response to a change in the “tax price” or value of the tax deduction. An elasticity 

greater than one in absolute value (that is, a value smaller than negative one or a value greater 

than positive one) implies that recipients of charitable contributions receive more increased 

funding than the government loses in foregone revenue. See Clotfelter, Federal Tax Policy and 

Charitable Giving.
16

computations that were required under prior law.”32 If a separate deduction for charitable 

contributions of nonitemizers is enacted, then individual taxpayers will be required to keep 

records to substantiate the deductions claimed. In addition, increased administrative burdens 

would be imposed on the Internal Revenue Service to ensure that taxpayers only claim 

deductions for charitable contributions that are actually made.

C. Data on Levels of Charitable Contributions and Charitable Contribution 

Deductions

The staff of the Joint Committee on Taxation (“Joint Committee staff”) estimates that, for 

2001, 37 million individual tax returns will claim more than $149 billion in charitable 

contributions prior to application of the present-law limitations on the charitable contribution 

deduction (such as the percentage of AGI limitations and the overall limitation on itemized 

deductions (the so-called “Pease” provision). (See Table 1, below.)

Table 1.--Tax Returns Claiming an Itemized Deduction For a Charitable Contribution

(2001 Projections)

Income category1

Number of tax returns

(thousands)

Dollars claimed

(millions)2

Less than $10,000 198 $112

$10,000 to $20,000 524 $588

$20,000 to $30,000 1,474 $1,875

$30,000 to $40,000 2,556 $3,601

$40,000 to $50,000 3,217 $5,841

$50,000 to $75,000 8,210 $17,887

$75,000 to $100,000 7,620 $20,171

$100,000 to $200,000 9,913 $36,537

$200,000 and over 3,283 $62,519

Total: 36,995 $149,131

Source: Joint Committee on Taxation

NOTE: Details may not add to totals due to rounding.

1

The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: 

employer contributions for health plans; employer contributions for the purchase of life insurance; employer share of 

payroll taxes; workers compensation; tax exempt interest; excluded income of U.S. citizens living abroad; 

nontaxable Social Security benefits; insurance value of Medicare benefits; and alternative minimum tax preference 

items.

2

The dollars claimed include those charitable contributions allowed as a deduction before the application of any 

present law limitations on the deductibility of charitable contributions, such as the percentage of AGI limitations or 

the overall limitation on itemized deductions (“Pease”).

A substantial amount of charitable donations made by individuals is not claimed as 

itemized deductions. However, there are no data that directly measure the magnitude of 

charitable contributions by non-itemizers. Tables 2 and 3, below, offer some indirect evidence 

 

32 Joint Committee on Taxation, General Explanation of the Tax Reform Act of 1986

(JCS-10-87), May 4, 1987, 11.
17

on the magnitude of such giving. Table 2 present estimates of the American Association of 

Fund-Raising Counsel Trust for Philanthropy of the total amount of charitable contributions 

received by qualifying organizations from individuals. By contrast, Table 3 reports itemized 

deductions claimed for charitable contributions as reported to the Internal Revenue Service. 

Comparison of the two tables would suggest that, in 1997, nearly $24 billion in charitable 

contributions made by individuals were not claimed as itemized deductions. Unfortunately, 

differences in the amounts reported in Tables 2 and 3 cannot be interpreted as measures of 

amounts of contributions made by non-itemizers. Evidence from audits and in taxpayer 

compliance studies establishes that many taxpayers overstate their actual charitable contributions 

when claiming itemized deductions.33 These findings suggest that, if one were to use the 

difference in the amounts reported in Tables 2 and 3 to estimate the magnitude of charitable 

donations by non-itemizers, the result would be to underestimate actual charitable contributions 

by non-itemizers.34 Moreover, experience with taxpayers who itemize suggests that, if nonitemizers were allowed to claim a deduction for their charitable contributions, many nonitemizers would also overstate their actual charitable contributions for the purpose of claiming a 

tax benefit.

Individual charitable contributions claimed as itemized deductions on individual tax 

returns have grown in every year since 1984, except from 1986 to 1987.35 Itemized deductions 

and total individual charitable contributions have grown more rapidly than the rate of inflation 

over this period.36 However, this real, inflation-adjusted, growth did not occur evenly over the 

period. Between 1984 and 1990, the real growth in individual charitable contributions claimed 

as itemized deductions was more modest than was real growth since 1990. There has been little 

analysis attempting to explain these trends.

 

33 Slemrod, Joel, “Are Estimated Tax Elasticities Really Just Tax Evasion Elasticities? 

The Case of Charitable Contributions,” The Review of Economics and Statistics, Vol. 71 (August 

1989), pp. 517-522.

34 Such a conclusion assumes that the figures reported in Table 1 are accurate estimates 

of total giving by individuals. Errors in these estimates of total donations could raise or lower 

estimates of donations by non-itemizers.

35 Most analysts attribute the high level of donations in 1986 followed by the lower level 

of donations in 1987 to the anticipation and enactment of the Tax Reform Act of 1986 which 

lowered expected future marginal tax rates for many taxpayers, thereby increasing the expected 

price of future donations. In addition, certain other modifications to charitable tax deductions as 

part of the individual alternative minimum tax may have altered the timing of some donations to 

charities. The increase in the standard deduction provided in the Tax Reform Act of 1986 also 

reduced the number of taxpayers who chose to itemize deductions.

36 The price level, as measured by changes in the consumer price index, increased by 

54.4 percent over the period 1984 through 1997.
Table 2.--Total Individual Charitable Donations Estimated to Have Been Received

By Charitable Organizations, 1984-1997

(Billions of Dollars)

1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

Total 

individual 

donations 56.46 57.39 67.09 64.53 69.98 79.45 81.04 84.27 87.70 92.00 92.52 95.36 107.65 122.95

Source: Giving USA 1999. Data do not include donations from trusts. Tabulations prepared by the staff of the Joint Committee on Taxation.

Table 3.--Individual Itemized Charitable Donations Claimed on Tax Returns, 1984-1997

(Billions of Dollars)

1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

Itemized 

deductions 

claimed for 

charitable 

donations 42.12 46.96 53.82 49.62 50.95 55.46 57.24 60.58 63.84 68.35 70.54 74.99 86.16 99.1

Source: Individual itemized deductions taken from Internal Revenue Service Statistics of Income data. Tabulations prepared by the staff of the Joint Committee on 

Taxation.

18