Why do some Americans rush to make charitable contributions at the end of the calendar year?

Jenn Henry

At the end of the year, some Americans rush to make donations to reduce the amount of taxes they have to pay, thanks to the charitable contribution tax deduction. Why do we have that deduction, and why does it work the way it does?

Generally speaking, tax law is an amazing body of law if you are interested in socio-legal analysis. Even more than many other bodies of law, tax law is closely tied to statutes passed by Congress. So what that means for those of us interested in the law as a window on society is: tax laws are a nice indicator of what society valued – and literally, how much it valued those things in dollars and cents – at any particular time. Yes, the laws Congress passes are an imperfect proxy for “society,” and dollars are an imperfect proxy for “value,” but still, this is a valuable window to look through. Before I delve into some of this amazing history — I promise, the legal history of tax law is actually interesting — a brief interlude about how tax deductions work:

~interlude~

Not all income is taxable. Tax forms help Americans figure out what portion of their income is taxable. Come tax time, Americans have two choices: 1) fill out a simple form, 2) fill out a complicated form. Approximately 70% of Americans, especially those of lower and middle income, opt for the simple form. Filling out the simple form, in TaxSpeak, is “taking the standard deduction.” The standard deduction is usually a few thousand dollars depending on a lot of factors: are you married, are you a citizen, are you blind (link goes to the IRS Interactive Tax Assistant for the “How Much is my Standard Deduction” online tool).

Filling out the complicated form (aka, “itemizing”), requires a taxpayer to list “deductions” — money that Congress has said taxpayers can subtract from taxable income because they like how the taxpayer spent that money and want to encourage that kind of spending. Itemizing may require the services of an accountant or lawyer.

This partly explains why it is not as common for lower and middle income people to itemize using the complicated form. It is easier to fill in the simple form using the DIY approach: no mistakes on deductions to haunt you in an IRS audit, no receipt saving, etc.

Another reason to choose the simple form is if a taxpayer’s itemized deductions (for charitable giving, business expenses, property tax, etc.) are smaller than the standard deduction.

Also, the more money you have, the more likely you are to have some of your money fall in a high tax bracket, and the higher the incentive will be to avoid taxes by donating to charity. For a married couple jointly making ~$60,000, the money they make above ~$17,000 will be taxed at 15%. For a married couple jointly making ~$300,000, the money they make above ~$220,000 will be taxed at 33%. The $60,000 couple making a $1,000 donation will be able to pay $150 less in taxes. The $300,000 couple making a $1,000 donation will be able to pay $333 less in taxes. As Simple Dollar notes, the charitable contribution tax deduction is not a dollar-for-dollar return on charitable donations. Instead, it is a bonus — “you donated to charity, you get a gold star” — 15 cents on the dollar for some families and 33 cents on the dollar for others.

(Note: just to be confusing, there are also some deductions you can take using the simple form. This is a quirk which I’m not going to explain, and is yet another reason why you shouldn’t be doing your taxes relying on this blog post. And we are not even going to go into IRAs and trusts and foundations, nuh-uh.)

All this is a complicated way of saying: deductions are gold stars that Congress has directed the IRS to give out to taxpayers who spend money in ways that Congress likes. But since the IRS is not like Santa Claus — they don’t see you when you’re sleeping and they don’t see you when you’re awake  – there is an application process to prove you deserve the gold star. Congress offers choices: either get the standard number of gold stars that we give you just because, or take a gamble on trying for some more gold stars if you have been an especially good money spender this year.

Now we can move on to when we started to have a deduction for charitable contributions and why.

The charitable contribution tax deduction first became part of the Internal Revenue Code in 1917. Its purpose was to encourage charitable giving. Then, taxpayers were allowed to deduct up to 15% of their income for charitable contributions (way less than what we allow today):

 Contributions or gifts actually made within the year to corporations or associations organized and operated exclusively for religious, charitable, scientific, or educational purposes, or to societies for the prevention of cruelty to children or animals, no part of the net income of which inures to the benefit of any private stockholder or individual, to an amount not in excess of fifteen per centum of the taxpayer’s taxable net income as computed without the benefit of this paragraph. Such contributions or gifts shall be allowable as deduction only if verified under rules and regulations prescribed by the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury.

War Income Tax Revenue Act of 1917, ch. 63, § 1201(2), as quoted in Vada Waters Lindsey, The Charitable Contribution Deduction: A Historical Review and a Look to the Future, 81 Neb. L. Rev. 1061 (2003).

In the last hundred years, this charitable contribution tax deduction has been tweaked and modified by dozens of Congress’s laws. We have been playing around with the following questions, among others:

For what percentage of income should we allow taxpayers to claim the charitable contribution tax deduction? 15%? Unlimited? 50% for public charities, 30% for private foundations? If you give more than that percentage, should that percentage carry over to later tax years?

SNAPSHOT: 1917. Congress limited the charitable contributions a taxpayer could claim to 15% of the taxpayer’s income.

SNAPSHOT: 1924. Congress added an exception for donors who gave more than 90% of their income for the last ten years in a row. (Talk about the one percent.) But the general rule remained the same: 15% limit.

SNAPSHOT: 1951. Congress raised the limit to 20%.

SNAPSHOT: 1969. Congress perceived a problem with tax abuse. In 1966, there were 154 taxpayers with incomes above $200,000 who paid no income tax thanks to deductions, a large percentage of which were charitable contributions, especially of property (according to H.R. REP. No. 91-413 (1969)). The Tax Reform Act of 1969 limited the percentage of income taxpayers could deduct for charitable contributions to 50%, or 30% for certain charities like nonoperating foundations.

What kinds of charities count? private foundations, only schools/religious organizations/hospitals?

SNAPSHOT: 1982. The Tax Equity and Fiscal Responsibility Act of 1982 added amateur athletic organizations to the list of eligible charities for the charitable contribution tax deduction.

SNAPSHOT: 1988. The Technical and Miscellaneous Relief Act of 1988 limited the deduction that could be claimed when a taxpayer donated money to a university and received the right to purchase athletic event tickets in exchange (can claim 80% of the contribution).

Do you need to itemize charitable contributions, or can these be taken alongside the standard deduction on the simple form?

SNAPSHOT: 1986. Congress sought to simplify tax laws. In 1982, Congress passed a temporary law that allowed non-itemizers to take the standard deduction and deduct for charitable contributions. But in 1986, Congress did not extend this ability.

This is nerdy entertainment and an imperfect account–not legal advice. As always, please feel free to contact me with corrections or ideas, either in the comments below or at thelawinlife@gmail.com. I dabble as an amateur when it’s tax season, but if you like this stuff, you should read Kelly Phillips Erb’s work on Forbes or Twitter or Facebook; she is the year-round virtuoso. 

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