Are the OBBBA changes to taxation of charitable contributions good or bad?
TLDR: Surprisingly okay. Regular folks will now be able to take a deduction up to $1K.
A few of you may know that I can geek out about tax policy. I have a LOT of concerns about how our taxes are structured at the federal, state, and local levels. There is a lot to understand in the One Big [not so] Beautiful Bill Act (OBBBA), and I appreciated reading some analysis by Nonprofit Attorney S. Mona Reza about Big, Beautiful Deductions—provisions that relate to charitable giving.
On the plus side, OBBBA brings back an above-the-line deduction for charitable contributions by non-itemizers (90% of taxpayers who take the standard deduction). This was temporarily available during the COVID pandemic but went away after two years. Now, most taxpayers will be able to deduct up to $1,000 per single taxpayer or $2000 for joint filers. Contributions must be to 501(c)3 organizations, and I am interested to see that donor-advised fund (DAF) contributions are excluded. I believe that DAF reform is sorely needed to prevent warehousing of charitable donations. This is a small but notable start.
Allowing non-itemizing taxpayers to deduct some charitable gifts is a major step toward greater equity, as are some other measures that modestly impact itemizers (a .5% of AGI floor before donations are deductible and a cap on the deduction rate for the highest income taxpayers).
A side note: Most nonprofit and philanthropic advocacy groups are in favor of any and all tax measures that incentivize charitable giving. However, it is important to note that incentivizing charitable giving results in less tax revenue. There are also some studies that indicate that the tax deduction does not influence behavior that much (people would have given anyway). Tax revenue is controlled more democratically than charitable giving, which is determined by donors, with wealthy donors exerting the most influence. So, charitable giving deductions in combination with wealth concentration in our county are resulting in more control of philanthropy (and by extension, nonprofits) by the wealthy, while public revenue is reduced.
Overall, we need to keep watching this and advocating for effective, equitable tax policies related to charitable giving. But these measures could be classed as good news for the nonprofit sector. Let’s hope there are more pleasant surprises ahead.
Image description: a folder with tax papers, a calculator, and a coffee cup arrayed on a black background. Photo by Kelly Sikkema on Unsplash