The Times Australia
The Times World News

.

What's the charitable deduction? An economist explains

  • Written by Patrick Rooney, Executive Associate Dean for Academic Programs, Glenn Family Chair, and Professor of Economics and Philanthropic Studies, IUPUI

The charitable deduction[1] is a dollar-for-dollar reduction in taxable income that lowers what someone owes the Internal Revenue Service[2]. Only donations to tax-exempt charities[3] count.

This giving incentive is available only for the 10% of American taxpayers who itemize their tax returns[4]. Taxpayers who itemize can sum up certain expenses, such as the interest they pay to for a home mortgage, and then subtract that money from their taxable income.

Here’s a hypothetical example: Clara Doe, a veterinarian, pays a 32% marginal tax rate[5] on her US$200,000 income as a single filer. Because she itemizes, her $100 annual donation to a local food pantry costs her $68 after taxes. Uncle Sam essentially pays the rest by giving her a tax break.

Most Americans instead use the standard deduction[6], a set amount of money based on how you file your taxes. As as of 2021, the standard deduction was $12,550 for single taxpayers. People claiming it subtract that amount from their income to see how much of it is subject to the income tax. The standard deduction usually saves more money than itemizing.

With the standard deduction, giving $100 costs, well, $100.

Netflix founder Reed Hastings applauds Most people who donate extensively to charity, such as Netflix founder Reed Hastings, use this tax break. Ernesto S. Ruscio/Getty Images via Netflix[7]

Why the charitable deduction matters

People give to charities for many reasons[8]. Tax breaks cannot be the main one because giving money away doesn’t make you better off financially.

As is true elsewhere[9], Americans tend to donate more with government incentives. Similarly, donors usually give away smaller shares of their income when Uncle Sam scales back those advantages.

Consider what happened once the 2017 tax reform package[10] took effect. Many economists predicted beforehand[11] that its reduction in giving incentives would prompt American taxpayers to give less to charity. And that did happen in 2018[12].

Although charitable giving has since rebounded, reaching new records[13], I believe the total could have been higher[14] if more Americans could deduct charitable contributions from their taxable income.

How many Americans claim the charitable deduction?

In 2019, only an estimated 8.5% of taxpayers[15] took advantage of this century-old tax break[16]. Nearly three times as many Americans[17] were claiming this deduction before the 2017 tax reforms.

There’s a simple explanation for this decline: The tax package nearly doubled the standard deduction. Most people who were itemizing until 2018 are now better off if they take the standard deduction instead.

That could change after 2025[18], when many of the 2017 tax reforms will expire.

The Conversation U.S. publishes short, accessible explanations of newsworthy subjects by academics in their areas of expertise.

References

  1. ^ charitable deduction (www.investopedia.com)
  2. ^ Internal Revenue Service (www.irs.gov)
  3. ^ tax-exempt charities (www.irs.gov)
  4. ^ 10% of American taxpayers who itemize their tax returns (par.nsf.gov)
  5. ^ marginal tax rate (www.investopedia.com)
  6. ^ standard deduction (www.investopedia.com)
  7. ^ Ernesto S. Ruscio/Getty Images via Netflix (www.gettyimages.com)
  8. ^ give to charities for many reasons (theconversation.com)
  9. ^ As is true elsewhere (doi.org)
  10. ^ 2017 tax reform package (www.investopedia.com)
  11. ^ economists predicted beforehand (www.aei.org)
  12. ^ did happen in 2018 (theconversation.com)
  13. ^ rebounded, reaching new records (theconversation.com)
  14. ^ total could have been higher (doi.org)
  15. ^ estimated 8.5% of taxpayers (par.nsf.gov)
  16. ^ century-old tax break (www.everycrsreport.com)
  17. ^ three times as many Americans (www.taxpolicycenter.org)
  18. ^ could change after 2025 (www.mlrpc.com)

Read more https://theconversation.com/whats-the-charitable-deduction-an-economist-explains-162647

Times Magazine

Building an AI-First Culture in Your Company

AI isn't just something to think about anymore - it's becoming part of how we live and work, whether we like it or not. At the office, it definitely helps us move faster. But here's the thing: just using tools like ChatGPT or plugging AI into your wo...

Data Management Isn't Just About Tech—Here’s Why It’s a Human Problem Too

Photo by Kevin Kuby Manuel O. Diaz Jr.We live in a world drowning in data. Every click, swipe, medical scan, and financial transaction generates information, so much that managing it all has become one of the biggest challenges of our digital age. Bu...

Headless CMS in Digital Twins and 3D Product Experiences

Image by freepik As the metaverse becomes more advanced and accessible, it's clear that multiple sectors will use digital twins and 3D product experiences to visualize, connect, and streamline efforts better. A digital twin is a virtual replica of ...

The Decline of Hyper-Casual: How Mid-Core Mobile Games Took Over in 2025

In recent years, the mobile gaming landscape has undergone a significant transformation, with mid-core mobile games emerging as the dominant force in app stores by 2025. This shift is underpinned by changing user habits and evolving monetization tr...

Understanding ITIL 4 and PRINCE2 Project Management Synergy

Key Highlights ITIL 4 focuses on IT service management, emphasising continual improvement and value creation through modern digital transformation approaches. PRINCE2 project management supports systematic planning and execution of projects wit...

What AI Adoption Means for the Future of Workplace Risk Management

Image by freepik As industrial operations become more complex and fast-paced, the risks faced by workers and employers alike continue to grow. Traditional safety models—reliant on manual oversight, reactive investigations, and standardised checklist...

The Times Features

Flipping vs. Holding: Which Investment Strategy Is Right for You?

Are you wondering whether flipping a property or holding onto it is the better investment strategy? The answer isn’t one-size-fits-all. Both strategies have distinct advantages a...

Why Everyone's Talking About Sea Moss - And Should You Try It Too?

Sea moss - a humble marine plant that’s been used for centuries - is making a major comeback in modern wellness circles. And it’s not just a trend. With growing interest from athle...

A Guide to Smarter Real Estate Accounting: What You Might Be Overlooking

Real estate accounting can be a complex terrain, even for experienced investors and property managers. From tracking rental income to managing property expenses, the financial in...

What Is the Dreamtime? Understanding Aboriginal Creation Stories Through Art

Aboriginal culture is built on the deep and important meaning of Dreamtime, which links beliefs and history with the elements that make life. It’s not just myths; the Dreamtime i...

How Short-Term Lenders Offer Long-Lasting Benefits in Australia

In the world of personal and business finance, short-term lenders are often viewed as temporary fixes—quick solutions for urgent cash needs. However, in Australia, short-term len...

Why School Breaks Are the Perfect Time to Build Real Game Skills

School holidays provide uninterrupted time to focus on individual skill development Players often return sharper and more confident after structured break-time training Holid...