Charity that Pays: Giving is good for you and your wallet

by Elaine Gast

Like many a taxpayer, I keep a file for my annual charitable donations. At tax filing time, when I'm knee-deep in records and receipts, nothing feels better than to see that file full. It shows me in terms of real dollars how I've supported the causes I care about -- not to mention the tax deduction I'm going to get because of those contributions.

Each year, Americans donate about 3 percent of their after-tax income to charity. Some do it out of the generosity of their hearts; some do it for tax benefits; and most do it for some combination of the two. No matter the motive, it's no secret that taxpayers look for ways to reduce the amount of taxes they pay. Charitable contributions are one way to do this.
 
"We don't believe taxes are the sole reason why people give. Giving goes hand-in-hand with people's passions," said Sandra Miniutti, vice president of marketing at Charity Navigator. Still, tax breaks don't hurt. "The tax benefit, without a doubt, spurs charitable giving."

Here's how: A charitable deduction lowers the actual amount of your donation by 15 to 35 cents per dollar, depending on your tax bracket. If you fall within a 15 percent bracket, a deductible $100 cash gift to charity will reduce your taxes by $15. Someone in a 30 percent bracket will deduct $30 for that same $100 donation. The higher your tax bracket, the more you can deduct -- meaning, not only can the wealthy afford to give more, but they are rewarded more for what they give.

Taxpayers have been allowed to deduct gifts to charity since 1917 -- just a few years after income tax itself appeared. Why the deduction? According to the Encyclopedia of Taxation and Tax Policy, it was intended "to subsidize activities that charitable organizations provided the public, as an alternative to the government." In other words, the government realized it couldn't help all of the people, all of the time -- so it awarded tax perks to organizations that do good, and the people who support them.

"The American people have a vested interest in nurturing a spirit of generosity," said Diana Aviv, president and CEO of Independent Sector, "and our tax policies are rightfully designed for that purpose." While that might be true, the IRS has its limits on how much generosity the American people can deduct.

Back in 1917, the federal government enacted a cap on the amount of charitable deductions to only 15 percent of taxable income. This was to control the government's revenue loss from all the deductions. Today, that cap is higher for most taxpayers -- up to 50 percent of an individual's adjusted gross income. But it can fall to as little as 20 percent, depending on the type of donation (capital gains property, for example).
 
Some say the IRS should eliminate the cap altogether to encourage people to give higher amounts. After all, shouldn't we reward those who empty their pockets in the name of charity? 
There was a brief moment after Hurricane Katrina hit when Congress said yes. Between Aug. 28 and Dec. 31, 2005, people could deduct cash contributions to public charities up to as much as 100 percent of their income. It was short-lived, but it did provide people another reason to send money.

A second debate that's been going on for years deals with who can deduct. Under the current law, not every taxpayer has the same incentive to give. As of the 1986 Tax Reform Act, only those who itemize their annual tax returns can claim charitable deductions. According to Independent Sector, 84 million Americans, or two-thirds of all taxpayers, take a standardized deduction. And if you're one of them, you're out of luck when it comes to deducting your good deeds.

It wasn't always this way. In 1981, Congress allowed charitable deductions made by non-itemizers -- but it expired five years later, and has yet to be renewed. The reason? According to the Congressional Budget Office, taxpayers who claim the standard deduction already receive recognition for their charitable contributions, at least in principle. And then there's the matter of money. Others say expanding the deduction would be too expensive for the IRS

"It makes sense why the IRS limits taxpayer deductions. After all, they want to make some income," said Charity Navigator's Sandra Miniutti. Yet, "many charitable groups think changing the rules would offer everyone more incentive to give, especially people of a lower income."

By best estimates, offering a charitable deduction to all taxpayers could stimulate new giving of up to $14 billion a year, according to Independent Sector. Its report Deducting Generosity shows that the ability to take a tax deduction plays a major role in donor decisions -- and households that itemize give to charity 40 percent more than those that don't.

Although Congress has proposed a renewal on the law several times in the last decade, charitable groups aren't holding their breath. Instead, they're celebrating a recent win.

Through 2007, a newly enacted Charitable IRA Rollover provision allows all taxpayers (including non-itemizers), age 70 ½ and older, to donate up to $100,000 from their Individual Retirement Accounts (IRAs) and Roth IRAs -- completely tax-free.

"This is a valuable giving incentive that encourages older Americans to donate," Independent Sector's Aviv said in a press statement. Although there is some hope for extension, as of now the law expires Dec. 31, 2007. Meaning, if you're over 70 and want to cash in your IRA, give now, and give fast.

For the rest of us lucky enough to take a charitable tax deduction, here's to yet another year of adding receipts to our "Donations" file, and better yet -- to knowing that in some small way, we made a difference.

Based in Palo Alto, Calif., Elaine Gast is a writer and communications consultant for nonprofits, foundations, membership associations, businesses, and individuals. She has authored six books, contributed to Fodor's Travel Publications, and published articles in numerous magazines and newspapers.  Elaine is president of Four Winds Writing, Inc.