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1 1 (March 14, 2022)

handle is hein.crs/govehac0001 and id is 1 raw text is: Congre &conaI Resedrch Sen/ce hnorning Ah eg iltive debate sne 1914 Updated March 14, 2022 The Charitable Deduction for Individuals The charitable deduction is a long-standing feature of the individual income tax. It is also one of the largest individual income tax provisions in terms of annual forgone revenue, an estimated $52.4 billion in FY2020. Before changes implemented by P.L. 115-97 (commonly referred to as the Tax Cuts and Jobs Act or TCJA), the tax expenditure for charitable contributions was larger, an estimated $57.0 billion for FY2017. This In Focus provides background information on the individual charitable deduction. The Deduction Under current law, taxpayers who itemize their deductions can-subject to certain limitations-deduct charitable donations to qualifying organizations. Qualifying organizations are generally public charities or private foundations with tax-exempt status under Internal Revenue Code (IRC) Section 501(c)(3); federal, state, or local governments; and other less common types of qualifying organizations. Tax-deductible donations to qualifying organizations can be in the form of cash or property. Property held for more than one year is often referred to as long-term capital gain property. Property held for less than a year is often referred to as short-term capital gain property. Depending on (1) the type of property donated and (2) the type of qualifying organization that receives the donation, there are limitations on the total dollar amount that can be deducted by the taxpayer in a given tax year. The limitations are defined as a percentage of the taxpayer's adjusted gross income, or AGI (computed without regard to net operating loss carrybacks), as noted in Table 1. If the amount deducted exceeds the taxpayer's AGI limitation, the excess can be carried forward and deducted on future years' tax returns for up to five years. For noncash donations, there are rules on how to value the property. Depending on the type of property and the recipient organization, the property is generally valued at its basis (i.e., what the taxpayer originally paid for the property with adjustments) or its fair market value (how much the taxpayer would receive in an open market for the property at the time it is donated), as noted in Table 1. Selected Legislative Background The charitable deduction was first enacted to offset the potential negative effects of increased income taxes on charitable giving as part of the War Income Tax Revenue Act of 1917 (P.L. 65-50). The overall amount that could be deducted was limited to 15% of net taxable income to prevent taxpayers from eliminating tax liability by claiming the deduction. The deduction has been changed dozens of times since enactment. Key legislative changes relevant to this In Focus are highlighted next. Table I. Limitations on Charitable Contributions Valuation Type of Rules for Limit (% of Donation Recipient Property AGI) Public charity; private Basis of the 50% Cash or operating foundation; property 60% (cash) short-term federal, state, local 100% (cash; gain capital government 2020 & 2021) property Private nonoperating Basis of the 30% foundation; other property Public charity; private Fair market 30% Long-term operating foundation; value Lopgterm federal, state, local capital gain gvrmn propertygovernment Private nonoperating Basis of the 20% foundation; other property Source: Internal Revenue Code (IRC) Section 170. Note: These are general rules, and there are numerous exceptions. AGI limits for cash contributions are temporarily 100% in 2020 and 2021, and 60% through 2025. For more information, see CRS Report R45922, Tax Issues Relating to Charitable Contributions and Organizations. Over time, Congress has modified the maximum amount that can be deducted in a given year by changing the income limitation. In 1952, as part of P.L. 82-465, Congress raised the limitation to 20% of AGI. In 1954, Congress increased the maximum deduction limit to 30% of AGI (P.L. 83-591) for donations to certain public charities. The Tax Reform Act of 1969 (P.L. 91-172) raised the deduction limit to 50% of AGI for donations to public charities and allowed deductions for contributions to private operating foundations. The 1969 act also imposed a 30% limit for contributions of appreciated property and imposed other restrictions on contributions of long-term capital gain property. The Deficit Reduction Act of 1984 (P.L. 98-369) raised the limitation on the deduction for donations of cash or short-term capital gain property to private nonoperating foundations from 20% to 30% of AGI. There were exceptions to these limits for particularly large gifts. The Revenue Act of 1924 (P.L. 68-176) specified that if a taxpayer made contributions exceeding 90% of net income in the tax year and each of the past 10 years, a full deduction was allowed. A phaseout of the unlimited deduction was included in the Tax Reform Act of 1969. In the early 1980s, temporary changes provided a charitable deduction to nonitemizers. The Economic Recovery Act of 1981 (P.L. 97-34) allowed taxpayers who took the standard deduction to also claim a deduction for charitable giving. This temporary provision went into effect in 1982, and was allowed to expire as scheduled at the end of 1986.

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