Charitable Giving When Filing Your Tax Return
By Gene Steuerle :: March 17th, 2010
Congress provided the new impetus for this type of proposal by allowing taxpayers to deduct charitable gifts for Haiti relief on 2009 tax returns, even though they were paid in January and February of 2010. It offered a similar proposal in 2005 for donations to tsunami victims. I predicted that Congress would likely accelerate offerings of these one-off accelerated deductions now that precedent was becoming well established.
My prediction came true, however, almost before the ink was dry on my article. The House just unanimously passed H.R. 4783 to provide similar relief for victims of the earthquake in Chile. But not victims of terrorism in Somalia. Or flood victims in West Africa. As I also noted for Haiti, where needs have indeed risen to an extraordinary level, the real need in many of these situations is for the long-term, not just for now. Congress is not that good at picking charities, and when it picks only one or another it tends to cause substitution—increased giving to favored causes but decreased giving for others.
OK, it’s clear that a more universal provision would be fairer and more efficient. Here I want to address the two concerns raised by a few to my proposal. No one, by the way, disagrees with the fundamental proposition that this type of incentive provides the best of all worlds from the perspective of public finance: outside of a potential minor acceleration of a deduction, the proposal costs nothing unless people actually give more! I can think of few other proposals or programs that meet such a rigorous benefit-cost calculus.
Concern 1: Is there an incentive? Of course. From a strict dollar-and-cents calculation, it’s true that an advanced deduction usually isn’t worth that much. But talk to anyone in marketing, and they’ll tell you that advertising works best when they’ve already got the buyers’ attention. And taxpayers give maximum attention to income taxes when filing returns. Moreover, only at tax filing time, after you’ve added up your income for the past year, can the tax software or accountant can tell you exactly how much you can save. Behavioral economists would agree that motivation, simplicity, and psychology all influence economic behavior.
This is a slam dunk. The natural marketing that would arise at tax filing time, enhanced by the publicity that charities would undertake, would significantly boost charitable giving. And, again, there’s almost no cost if it doesn’t. It’s win-win.
Concern 2: Is compliance an issue? It could be, but it can be turned to an advantage rather than disadvantage. That is, it can be handled in a way that improves compliance. With the type of incentive provided for Haiti and Chile, some people may forget next year that they claimed their deduction on last year’s return. Depending upon how well they keep their own records, errors will occur. Suppose, however, that the new deduction would be made available more generally for donations to charities that agree to file an information report to both IRS and individuals, much like the reports that financial institutions make on individual retirement account contributions. Charities are already required to send reports to individuals for gifts of more than $250; similar reports could be filed with IRS, although Social Security numbers would need to be collected.
What about charities that don’t want to do the extra filing? They don’t need to volunteer for this new opportunity. Charities can voluntarily opt into this system or not. And IRS can allow smaller charities to ease into the system over time.
Now we’ve got another win-win. We’ve solved the problem of granting a double deduction, and we’ve made it a lot easier for the IRS to check up on gifts throughout the year—thus improving compliance.