By: Anthony Miduri
I. INTRODUCTION
Alcohol, cigarettes, and gambling—all things that moms tell us to stay away from. Ironically, the United States government has a similar thought process. The federal government expresses its disdain for alcohol, cigarettes, and gambling through “sin taxes.”[1] The idea behind a sin tax is that by increasing the price of products and activities that are deemed harmful or negative to society, overall use of or participation in these products and activities will then decrease.[2] Thus, if the government taxes bad behavior, they should theoretically reward good behavior—besides, failure to do so would be a direct violation of Sir Isaac Newton’s Third Law.[3]
In fact, the government has historically used tax policy to reward behavior that encourages both “social goals” and “activities that Congress has deemed worthy of support” through something called “tax expenditures.”[4] A tax expenditure creates some sort of preferential tax treatment (i.e., deductions) for an individual who engages in some form of positive conduct.[5] On this note, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) created a new tax expenditure by amending § 62(a) of the Internal Revenue Code (“IRC”) in a way that allowed all individuals to take an “above-the-line” deduction for charitable contributions (hereinafter the “CARES Act charitable deduction method”).[6] Previously, deductions for charitable contributions were only available to taxpayers that itemized their deductions, not to those who took the standard deduction (hereinafter the “traditional charitable deduction method”).[7] During the tax years 2020 and 2021, which implemented the CARES Act charitable deduction method, every taxpayer in the United States had the opportunity to claim a deduction for their philanthropic contributions regardless of whether they chose to itemize deductions or take the standard deduction.[8] Despite this implementation rewarding charitable behavior, the allowance was not extended for 2022 and the years that follow.[9]
II. BACKGROUND
The Federal Income Tax classifies deductions into three types: above-the-line deductions, the standard deduction, and itemized deductions. Understanding the distinctions between these three deductions is imperative to comprehend the significance of the difference between the CARES Act charitable deduction method and the traditional charitable deduction method.
Generally, a deduction decreases an individual’s taxable income by a specified dollar amount and, in turn, typically reduces the amount of tax due.[10] Thus, a taxpayer who claims a $100 deduction would essentially have the same tax result as if they reported $100 less of income. Every taxpayer may take an above-the-line deduction if they meet the enumerated qualifications.[11] In 2020 and 2021, when the CARES Act governed charitable deductions, charitable donations were included as an above-the-line deduction.[12] Any taxpayer who donated money to a qualified charity could reduce their taxable income by the dollar amount that they contributed, not to exceed $300 for an individual, or $600 if married and filing jointly with a spouse.[13]
When looking at the other two forms of deductions, the standard deduction and itemized deduction, a taxpayer may only elect for one of the two to be applied to their taxes. Typically, one will take whichever deduction is greater in an effort to receive an optimal financial outcome. In 2023, the standard deduction reduced an individual’s taxable income by $13,850, or double that if married and filing jointly.[14] As for itemized deductions, a plethora of options are available to a taxpayer.[15] If the sum of one’s itemized deductions exceeds that of the applicable standard deduction, an individual will likely opt into itemizing for that tax year.
Charitable contributions currently are, and traditionally have been, classified as itemized deductions.[16] This means that going forward, an individual will only receive a deduction for their charitable contributions if they elect to itemize their deductions. Recent data underscores the potential incentive issue with this regime: in 2020, 87.3% of taxpayers elected the standard deduction on their tax return.[17] Thus, under the traditional charitable deduction method, the near 90% of taxpayers who elected the standard deduction would not have received a corresponding tax benefit had they donated.[18]
The CARES Act regime remedied this incentives issue for a mere two years, but post-2022 we’ve returned to this problematic status quo. Proponents of the traditional charitable deduction method likely emphasize that donors should not receive a deduction in addition to the standard deduction because they donated to a charity and that the government lost a significant (and unnecessary) amount of tax revenue by partaking in this practice during the CARES Act regime.[19] Morally, many of us have heard the mantra, “do good and lend without expecting any return.”[20] Fiscally, maybe the allowed deduction in 2020 and 2021 did create an unnecessary loss. However, there are an abundance of reasons as to why it makes sense to allow all taxpayers a deduction for their charitable contributions.
III. ANALYSIS
Congress already attempts to promote certain behaviors with tax benefits in the form of tax expenditures.[21] Some common examples of tax expenditures today are the allowance of a deduction for home mortgage interest and the preferential tax rate on long-term capital gains.[22] These tax benefits are included in the IRC to reward individuals who pursue the “American Dream” to own a home and to reward those who engage in entrepreneurial activities, respectively.[23]
The IRS states that taxes are intended to raise revenue so that federal, state, and local governments can provide services and benefits to citizens.[24] Black’s Law Dictionary defines charity as, “aid given to the. . . general community. . .” [25] Thus, a charitable donation and a tax payment, while in different forms, are intended to achieve a similar goal, improve aspects of the public domain.
When an individual donates $100, they no longer have that money in their pocket—that $100 bill is on its way to contribute to society, much like a tax would. Thus, there is less incentive to tax that $100 of income that has been donated as compared to taxing $100 put toward selfish consumption. Consequently, the CARES Act charitable deduction method seemingly promotes fairer treatment to those who contribute to the betterment of society.
The question then becomes—is it worth it for the government, which works for the people, to incentivize home ownership and stock market investments, but not charitable contributions? While the answer is likely too complex for one law student to answer, revisiting which charitable deduction regime, traditional or CARES Act, better serves society by engaging in some illustrative cost-benefit calculations seems a worthy effort.
Using the most recent statistics available: approximately 160,600,000 individuals file a tax return in a given year.[26] As mentioned, around 87.3% of taxpayers will likely take the standard deduction in a given year.[27] This equates to approximately 140,203,800 individual tax returns where the standard deduction is taken (“standard deduction tax returns”). For the year 2021, it was reported that 56% of Americans donated to a charity.[28] This percentage multiplied by the amount of standard deduction tax returns results in 78,514,128, a rough estimate of the amount of individual tax returns where the standard deduction was taken, and the taxpayer donated (“standard deduction tax returns with donations”). As previously stated, the CARES Act charitable deduction allowed for a maximum of a $300 deduction to those filing independently, and a maximum of $600 to those filing jointly.[29] It has also been reported that about 33.7% of tax returns are filed using the joint status, leaving 66.3% to be filed by singles.[30] This means that of those standard deduction tax returns with donations, 26,459,261 are filed jointly and 52,054,867 are filed independently. When multiplying these totals by their respective maximum deductions, it reveals that no more than $15,875,556,600 of charitable deductions would be allowed to joint filers and $15,616,460,100 to independent filers. The summation of these dollar values results in the combined sum of charitable deductions allowed to taxpayers with the CARES Act charitable deduction method in place, $31,492,016,700 (“total CARES Act charitable deduction allowed”). The total CARES Act charitable deduction allowed multiplied by the average income tax rate of an individual taxpayer, 13.6%, results in $4,282,914,271 of avoided tax revenue.[31] This almost $4.3 billion is an approximation of the tax dollars that Congress would miss out on if they reinstituted the CARES Act charitable deduction method. While $4.3 billion appears to be an astronomical dollar value, “[t]he IRS collected. . . $4.9 trillion of total tax revenue from return filings in fiscal year 2022.”[32] That means that the Treasury would lose out on less than 0.088% of total tax revenue if the charitable deduction rules governed by the CARES Act were to be reinstated.[33]
The above calculations are a mere estimate of the amount of revenue that the IRS would lose if they returned to the charitable donation rules that governed the United States tax system for the fiscal years 2020 and 2021. To put this percentage of revenue lost into the perspective of an individual, it would be equivalent to your employer paying you $99,912 this year as opposed to $100,000.
Opposers of the CARES Act charitable deduction method also worry about the potential for abuse.[34] However, this appears highly unlikely. Currently, charitable contributions may only be deducted if the donation meets the rules prescribed in the Internal Revenue Code.[35] Additionally, the organization that receives the donation must meet more qualifications enumerated elsewhere in the IRC.[36] Essentially, Congress dictates how one must donate and to whom/what that individual may donate before the taxpayer can deduct the contribution. These standards do appear necessary to prevent individuals from taking advantage of the tax system. Charitable contributions made under the CARES Act had to meet these same requirements and the eventual deduction that resulted from them was limited.[37] Since the traditional charitable deduction has remained in place since 1917, it stands to reason that an unproblematic amount of abuse has occurred with its use, or Congress likely would have amended the applicable section of the Internal Revenue Code.[38] While active, the CARES Act method was held to the same level of scrutiny as the traditional method and limited the benefit that taxpayers were able to achieve through its use. Thus, by placing additional limitations on a tax expenditure that has historically seen minimal abuse (the traditional charitable deduction), one can conclude that the probability of future manipulation should decrease.
IV. CONCLUSION
Few can argue against the statement that today’s world could use a little more philanthropic behavior.[39] Allowing a limited, above-the-line deduction to all taxpayers is a modest way to break the ice.[40] A permanent return to the charitable deduction treatment under the CARES Act would retain the standards which govern the traditional charitable contribution method, but also allow for an additional, limited deduction for those who donate to qualified charities and take the standard deduction.[41] Through a tax expenditure, the CARES Act charitable deduction method would provide a fairer treatment to those who contribute to society while immaterially affecting the amount of total tax revenue that the IRS collects.[42] For these reasons, Congress should revisit the idea of instituting permanent CARES Act treatment to those who make charitable contributions.
Footnotes
[1] Susan K. Urahn, Are Sin Taxes Healthy for State Budgets?, The Pew Charitable Trusts (July 19, 2018), https://perma.cc/EZ5E-FQ7N.
[2] Elyssa Carlos, An Overview of Sin Taxes, OptimaTax Relief (Dec. 8, 2022), https://perma.cc/FZ9C-PY85.
[3] Science in Action: Newton’s Third Law of Motion, Space Ctr. Hous. (Feb. 22, 2022), https://perma.cc/7HZE-WCTK. (“For every action there is an equal and opposite reaction”).
[4] Frank Sammartino & Eric Toder, Tax Expenditure Basics, Tax Pol. Ctr. 2 (Jan. 22, 2020) https://perma.cc/G5D3-GZXD.
[5] See Allaire U. Karzon, Tax Expenditures and Tax Reform, 38 Vanderbilt Law Review 1397, 1399 (1985) (reviewing Tax Expenditures, a book describing the innerworkings of tax expenditures, authored by Stanley Surrey, the man who coined the term “tax expenditure” and is widely recognized as the greatest tax scholar in United States history, and Paul R. McDaniel).
[6] CARES Act, Pub. L. No. 116-136, § 2104(a) (2020).
[7] Topic no. 506, Charitable contributions, Internal Revenue Service https://www.irs.gov/taxtopics/tc506 (last visited Feb. 4, 2023).
[8] Expanded Tax Benefits Help Individuals and Businesses Give To Charity During 2021; Deductions Up To $600 Available For Cash Donations By Non-Itemizers, Internal Revenue Service (Sept. 17, 2021), https://perma.cc/NF59-FWBS.
[9] Charitable Contributions, I.R.S. Pub. No. 526, Cat. No. 15050A (Feb. 13, 2023), https://perma.cc/73XC-TQ6X.
[10] Deductions For Individuals: What They Mean And The Difference Between Standard And Itemized Deductions, Internal Revenue Service (Apr. 13, 2023), https://perma.cc/2UUZ-N25Y.
[11] I.R.C. § 61.
[12] See supra text accompanying note 6.
[13] Charitable Contributions, supra note 9 (explaining what constitutes a “qualified charitable deduction”).
[14] IRS Provides Tax Inflation Adjustments For Tax Year 2023, Internal Revenue Service (Oct. 18, 2022), https://perma.cc/82CH-3MYQ.
[15] Itemized Deductions, Internal Revenue Service, https://perma.cc/T8P6-VB5F (last visited Feb. 2, 2023) (explaining that qualified medical and dental expenses, certain taxes paid, casualty and theft losses are potentially deductible on an itemized basis).
[16] Paul Arnsberger et al., A History of the Tax-Exempt Sector: An SOI Perspective, Internal Revenue Service (Winter 2008), https://perma.cc/DC37-2WSP (stating that the traditional charitable deduction treatment spanned the years 1917 – 2019 and 2022 – current).
[17] Medora Lee, Is It Better to Itemize or Take Standard Deduction? Learn What’s Better When Filing Taxes, USA Today (Feb. 15, 2023) https://perma.cc/75DT-QHZK.
[18] Statistics on the number of individuals who took the standard deduction for the tax years following 2020 were not considered for ease of analysis. However, nothing in recent literature suggests that the American Taxpayer has strayed from this norm.
[19] John R. Brooks II, Doing Too Much: The Standard Deduction and the Conflict Between Progressivity and Simplification, 2 Colum. J. Tax. L. 203, 206-07 (2011).
[20] Luke 6:35.
[21] See generally supra Part I.
[22] Tax Expenditures, Econ. Pol. Inst., https://perma.cc/JC8Z-82AD (last visited Feb. 4, 2023).
[23] Edward L. Glaeser & Jessee M. Shapiro, The Benefits of the Home Mortgage Interest Deduction, National Bureau of Economic Research (Jan. 2003), https://perma.cc/QGF8-LQUW.
[24] The Why of Taxes: Theme 1: Your role as a taxpayer lesson 1: Why pay taxes?, Internal Revenue Service, https://perma.cc/82JA-NAS4 (last visited Feb. 4, 2024).
[25] Black’s Law Dictionary (11th ed. 2019).
[26] IRS releases fiscal year 2022 Data Book describing agency’s activities, Internal Revenue Service (Apr. 14, 2023), https://perma.cc/6BCT-LZTG.
[27] Lee, supra note 17.
[28] Dawn Papandrea, 56% of Americans Donated to Charity in 2021, at Average of $574, LendingTree (Nov. 29, 2021), https://perma.cc/Q3ZD-HBNV.
[29] Charitable Contributions, supra note 9.
[30] SOI Tax Stats – Individual Statistical Tables by Size of Adjusted Gross Income: Table 1.6: Tax Year 2021, Internal Revenue Service https://perma.cc/FQT4-6DUC (last visited Feb. 28, 2024).
[31] Erica York, Summary of the Latest Federal Income Tax Data, 2023 Update, Tax Found. (Jan. 26, 2023), https://perma.cc/9U3T-WL9C.
[32] Martha Waggoner, IRS collects record setting $4.9 trillion in tax revenue in FY 2022, J. Acct. (Jan. 4, 2024), https://perma.cc/9EFM-47XG.
[33] Percentage calculation: 4,282,914,271/4,900,000,000,000 or avoided tax dollars divided by total tax revenue.
[34] C. Eugene Steuerle, The CARES Act Charitable Deduction For Non-Itemizers Was A Lost Opportunity To Help Beneficiaries Of Non-Profits, Tax Pol. Ctr. (May 19, 2020), https://perma.cc/SA7U-YWEB.
[35] I.R.C. § 170.
[36] I.R.C. § 501.
[37] CARES Act, Pub. L. No. 116-136, § 2104 (2020).
[38] Margot L. Crandall-Hollick, The Charitable Deduction for Individuals: A Brief Legislative History, Congressional Research Service (June 26, 2020), https://perma.cc/K9P8-UJSE.
[39] Of course, Philanthropy cannot be seen as an adequate substitute for government application of funds for the public benefit, but it seems a device for which spending supports more public good comparatively.
[40] See supra Part I.
[41] See supra Part II – III.
[42] See supra text accompanying notes 31-33 (discussing that approximately just .09% of total tax revenue will be lost).
About the Author
Anthony Miduri is a second-year J.D. Candidate at Penn State Law. Originally from Cleveland, Ohio, Anthony graduated from the University of South Carolina with a Bachelor of Science in Accounting. Before attending Law School, Anthony worked as a Tax Preparer with Abernethy & Company, PC. At Penn State Law, Anthony participates in the IRS Volunteer Income Tax Association Program and has conducted research on behalf of Professor James M. Puckett.
Suggested Citation: Anthony Miduri, Rewarding Philanthropy Through the Internal Revenue Code: Why Congress Should Revisit CARES Act Treatment of Charitable Contributions, Penn St. L. Rev.: F. Blog (Mar. 26, 2024), https://www.pennstatelawreview.org/the-forum/rewarding-philanthropy-through-the-internal-revenue-code-why-congress-should-revisit-cares-act-treatment-of-charitable-contributions/.