I mostly listen to podcasts while driving in my car. But occasionally I want to hear what’s going on in the news, so I’ll turn my radio to my local NPR affiliate. All during December, the announcers kept asking for donations. No problem. I understand that WCQS is a non-profit organization which relies on its listeners for financial support.
But what really peeves me is when the announcers say, “Your donation is tax deductible” — as if that statement is an incontrovertible FACT, when it simply isn’t. Deducting charitable contributions from your taxable income is an available option only if your itemize your deductions, which 64.4% of Americans do not. So only one-third of U.S. taxpayers receive an explicit tax benefit for their donations to qualifying non-profit organizations.
But presumably we all derive benefits from the robust functioning of non-profits in our society. Whether it’s your local public radio station, the Humane Society, the Red Cross, or your church, we all benefit from those organizations’ ability to provide services. So why then can’t all taxpayers receive the same preferential tax treatment for their charitable contributions? Why is the deduction limited only to those taxpayers who itemize? And furthermore, is it really necessary to bribe citizens with tax benefits in order to encourage charitable giving?
What exactly is an “itemized” deduction?
U.S. taxpayers may do either one of two things: they may take the “standard deduction” at the top of page 2 of their Form 1040, or they may “itemize” their deductions on Schedule A of Form 1040. Itemized deductions include the following:
- Medical and dental expenses;
- Taxes paid, including sales tax, state income tax, and property tax;
- Mortgage interest paid;
- Gifts to charity;
- Casualty and theft losses; and
- Assorted other miscellaneous expenses.
Generally speaking, if your total expenses in those categories (subject to various limitations) exceed the standard deduction in any given year, you should itemize your deductions on Schedule A in order to derive a greater tax benefit.
And the one thing that usually tips the balance in favor of itemizing your deductions is mortgage interest.
If, like me, you have no mortgage interest, you’ll most likely take the standard deduction — which means that your $250 check to the Sierra Club and your $250 donation of household items to Goodwill are NOT tax deductible.
I’ve long been curious about the history of tax deductions in America, particularly those found on Schedule A. (I’ll go ahead and say it for you: I’m a nerd.) I learned from this 2002 Congressional Budget Office report that taxpayers have been able to deduct charitable donations since 1917, and they’ve always been classified as itemized deductions. The deduction was intended to subsidize the activities of private organizations that provide viable alternatives to direct government programs.
What I didn’t want to spend hours trying to discern is why, exactly, deductions for charitable donations aren’t found on the bottom of page 1 of Form 1040. Deductions located there are available to every taxpayer regardless of whether the taxpayer itemizes or takes the standard deduction, and they’re known as “above the line” deductions.
I really have no idea why gifts to charity are only deductible to certain taxpayers (those who itemize) but every taxpayer may deduct “above the line” expenses, which include (among other things):
- Educator expenses;
- Business expenses;
- Rental expenses;
- Contributions to a Health Savings Account (HSA) and/or an Individual Retirement Account (IRA);
- Moving expenses;
- Student loan interest; and
- Payments for tuition and fees.
Here’s the Congressional version of why donations are different
Supposedly, adding an “above the line” deduction for charitable conrtibutions would increase the record-keeping burden and create unnecessary complexity for that majority of taxpayers who currently don’t itemize.
Ummm, excuse me?
In terms of record-keeping, what’s so different about recording gifts to charity (the tax deduction for which is available only to itemizers) and recording IRA contributions (the tax deduction for which is available to everyone)?
I scratch my head at this.
You get your transaction confirmation from your IRA trustee and you throw it in your shoebox. Recorded.
You get your receipt from Goodwill and you take a picture of it to upload to DropBox. Recorded.
I don’t see any extra “record-keeping burden” or “added complexity” there, do you?
(The bottom line is that there’s actually quite a lot of political wrangling going on behind the scenes of every tax deduction and where it shows up on the Form 1040. Surprising, huh? Not!)
NOTE! Just because your gift isn’t tax deductible doesn’t mean you shouldn’t give
The point of this post isn’t to chastise non-profits for their bit of false advertising when they state that “Your donation is tax deductible.”
It isn’t to question whether or not our insolvent federal government should continue subsidizing gifts to charity via tax deductions at all. (Because THAT is a subject for an entirely different post!)
Nor do I intend to even remotely suggest that charitable giving should be motivated by preferential tax treatment. In fact, I believe quite the opposite. If you have the means to give, then GIVE GENEROUSLY, regardless of tax implications.
I simply want to highlight one of the tax code’s most vexing little quirks. So many things about the tax code make absolutely no sense, and this is definitely one of them.