If you are anything like me, you probably received what seemed like countless end of year fundraising solicitations between Thanksgiving and New Year’s Eve that in very conspicuous ways reminded you that your gift is tax deductible. I received numerous emails and direct mail pieces from schools I attended and other nonprofits as the year wound down with language and large fonts screaming that the time is now to make that gift so that I can claim a tax deduction for 2022. Using more language that publicizes the tax deduction benefit in November and December is nothing new to fundraising operations. However, changes in tax law over the past five years have made this common fundraising practice worth examining from a new ethical lens.
First, we need to understand how we got to where we are now. Charitable tax deductions, in one form or another, have been a component of the U.S. tax system for nearly as long as there has been a federal income tax. There have been some major legislative changes over the past hundred years that ebb and flow how much of a benefit one can claim for their charitable dollars. Possibly the most important thing to keep in mind when talking about the charitable tax deduction is the standard deduction and its impact on how many Americans file their taxes. The history of the standard deduction is also quite nuanced, but the important thing to note is that Congress created the standard deduction in the early 1940s as a means to make tax filing simpler for many people, removing many of the burdens and record keeping that can make filing taxes complicated. It was immediately well received, with over 80% of tax filers claiming the standard deduction in 1944.
Utilization of the standard deduction has shifted over the years due to factors like inflation and tax law legislation. That said, the standard deduction has largely been an effective tool for lower and middle income taxpayers to file their taxes in an easier way. It provides a relatively simple tax filing option while taking away itemized deductions such as mortgage interest payments. One unfortunate aspect of the standard deduction is that it has taken away any charitable tax benefit for middle class taxpayers for most of the past seventy years. The government has, for the most part, always said that charitable giving is a tax deduction for itemizing taxpayers only. Signaling that standard deduction non-itemizing taxpayers, in most years a high majority of taxpayers, might give to charities but that their gifts were not worthy of documentation or tax benefits reserved for the wealthy.
So, why are things more complicated now than ever before? For one, the 2017 Tax Cuts and Jobs Act nearly doubled the standard deduction and eliminated or restricted many itemized deductions in 2018 through 2025. As a result, the percentage of Americans who file itemized taxes recently dropped from nearly 30% to 11%. This change in tax policy alone took away any tax incentive for millions of people to give to charity. Now, there is yet another set of tax law changes that taxpayers and fundraisers need to consider. After years of the charitable tax deduction being exclusively designated as a below-the-line tax deduction for itemizing taxpayers, COVID-era legislation gave taxpayers an above-the-line deduction for their charitable contributions in tax years 2020 and 2021. This special tax provision, within the CARES Act, allowed more Americans easily to deduct up to $300 for individual filers, and $600 for joint filers, in donations to qualifying charities on their 2021 federal income tax returns. Unfortunately, this tax provision was not extended for tax year 2022, something many taxpayers and nonprofits may not be aware of.
While nonprofits have been publicizing the fact that charitable contributions are tax deductible for decades, it would be fair to say that most taxpayers previously understood that those tax deductions were for taxpayers that itemize. However, after two years of a universal charitable tax deduction, it is very likely that many taxpayers will be unpleasantly surprised when preparing their tax returns this spring. Which raises the question: what role do fundraisers and nonprofit organizations play when it comes to educating their donors about charitable tax deductions? Ideally, nonprofits would not be in this position with such rapidly shifting laws. The confusion and unfairness of the current policy falls strictly on Congress. It is not the role of nonprofits to keep every donor up to date on the laws pertaining to charitable tax contributions. And while using language in solicitations that remind donors of tax deductions in general is by no means strictly unethical, nonprofits should consider the recent legislative changes and the confusion that presently exists.
Join the Center for Civil Society on March 29 for a webinar on the charitable tax deduction featuring Elizabeth McGuigan and Howard Husock. Register here!