The impact of last year’s One Big Beautiful Bill Act on charitable tax deductions, particularly for high-income donors, has prompted scholars and policymakers alike to rethink the incentives around charitable giving.
Starting this year, only charitable gifts exceeding 0.5% of a taxpayer’s Adjusted Gross Income (AGI) will be deductible, so if one’s AGI is $200,000, the first $1,000 of charitable gifts will not be deductible. And donors in the 37% federal tax bracket will see their deductions capped at 35% of their gifts’ value, so a $100,000 deduction could be reduced by up to $5,405.
The truth is, taxpayers don’t know what their AGI will be this year, let alone what 0.5% of it will be. But what if they could make this year’s charitable gifts anytime through April 15, 2027, when they would know exactly how much tax relief their donations would buy them?
Behavioral psychologists tell us that empowering the taxpayer to decide how much to donate to charity during tax time -- when she knows how much of a federal subsidy her gift would trigger -- should incentivize greater charitable support.
The .05% floor will also encourage some taxpayers to “bunch” their charitable giving into tax years when it will do them the most good, a strategy easier to implement if they were to have until Tax Day to finalize their giving decisions. Tax-Day charitable deductions should also reduce the volatility in revenue charities would likely experience if bunching catches on, as it probably will.
The Tax-Day charitable deduction is a donor-centric, pro-charity proposal with positive societal implications. It would nudge pro-social behavior at the very moment prospective donors are most receptive. It would improve the efficiency of charitable incentives. And it would strengthen civil society infrastructure.
Still, with Congress fractured as never before, legislative action is unlikely anytime soon. But it’s not too soon for those who see merit in allowing taxpayers to make and deduct charitable donations up until Tax Day to start mobilizing public support. Their efforts today can improve the odds that a future Congress will take seriously the potential of revising our tax code in order to help taxpayers render better financial decisions, to reduce volatility in nonprofit budgets, and to make the public costs and benefits of charitable donations more transparent.
The donor community, the social sector and the rest of us deserve no less.
To explore sophisticated tax-savings opportunities available to you and your business, please feel free to reach out to Marc Lane in confidence at MLane@MarcJLane.com or 312/800-372-1040.