Over the past century, tax incentives for giving to charity have helped improve American society in countless ways, from spurring medical research to building more vibrant communities to providing a safety net for those most in need.
Yet Congress is now considering changes to the tax code which would greatly reduce the already-too-slim proportion of taxpayers who can benefit from existing incentives for charitable giving. Instead lawmakers should adopt a new approach that treats taxpayers more fairly, broadens the nation’s philanthropic base and helps defray government spending.
Congress and the Trump Administration should consider authorizing “Flexible Giving Accounts” (or “FGAs”) that would allow American workers — whether they itemize deductions on their tax returns or not — to set aside money for charities of their choice. Workers would not have to pay taxes on the part of their income that they donate to charity.
It’s a concept that would be familiar to more than 100 million Americans who opt in to consumer-directed accounts (such as FSAs, HRAs, HSAs), which allow participants to use pre-tax payroll deductions to defray the cost of everything from doctor visits to day care. With FGAs, millions more Americans would be able to efficiently leverage the tax code to benefit worthwhile charities, creating a whole new class of “everyday philanthropists.”
Currently, the tax code allows income tax deductions for charitable donations, but only for the roughly one-third of filers who itemize deductions on their returns. Nearly all individual taxpayers in the highest income tax bracket itemize deductions and can reduce their tax obligations through a charitable deduction.
In contrast, fewer than a quarter of Americans making less than $100,000 itemize and thus most are unable to receive a tax reduction from their giving. The proposed hike in the standard deduction that’s now on the table would further discourage taxpayers from itemizing deductions and reduce an important incentive for charitable giving.
Here’s how FGAs would level the playing field.
As an extension of their existing fringe benefits plans, companies could offer workers the opportunity to set aside a portion of their pre-tax earnings for charitable contributions. Each participating employee would select a certain amount from each paycheck to go into a dedicated FGA. The employee could then distribute that money to the charitable organizations of his or her choice. That could include qualified religious and educational organizations and any other entities for which donations are currently tax deductible.
This new option would complement the standard deduction and traditional itemized charitable income tax deduction. Implementation requires just a simple update to the tax code and would not affect those who itemize their contributions.
To avoid double-dipping, taxpayers who make use of a FGA would be unable to file for a charitable deduction, and those who itemize their charitable deductions would be unable to use a FGA for the charitable gifts they itemize.
For millions of Americans, the change would open up a convenient way to regularly donate. Since it makes use of a common method of employee benefits management, it would be easy and inexpensive for many companies to establish. Since one of us founded and runs a third-party benefit administration company, we can say with confidence that this would add little expense for any company to administer. In our case we wouldn’t charge participants anything to add the option.
FGAs would yield distinct benefits to employers, especially small-to-midsized businesses that could pay less in payroll tax. What’s more, there is a growing body of evidence supporting the wellness benefits of individual giving. Improving corporate citizenship also has been shown to improve sales, visibility, and employee recruitment and retention.
Broadening the nation’s philanthropic base would foster more routine, predictable donations rather than a big donation frenzy at the end of each year. That would enable charities to plan more wisely and leverage projected gifts to maximum effect.
This model also would enable the public and private sectors and the philanthropic community to work together to increase the national giving rate — which could dramatically reduce expenditures for government-funded social programs. FGAs provide a fiscally responsible way for Congress to make America’s giving pool larger and more economically, geographically and racially diverse. Consider that donations to charity accounted for about 2% of GDP last year. If FGAs spur an increase of just one percentage point that would mean that hundreds of billions of dollars more would go to our nation’s charities.
Finally, it is just a fundamentally fair approach. Many Americans do not have the capacity for the meticulous record keeping it takes to itemize their returns, but they do deserve a tax break for their philanthropy. After all, donors who open their wallet for charity put their consideration for others first, so the least we can do is seriously consider a way to benefit those who give.
After all, Americans at all income levels are generous and want to help those in need. More than two-thirds of households give to charity, and research has shown that when presented with the opportunity, people take advantage of new ways to donate. Those who do should get a tax benefit.
Charitable gifts made through an FGA would result in some net revenue loss for the federal government, although that cost would be offset by reductions in individuals who would otherwise take the itemized charitable deduction. However, increased charitable giving can save the government money by reducing spending costs; if a charity is providing sufficient welfare assistance to those in need, there is less demand for direct government benefits.
As tax code reform moves forward, Congress and the Trump administration have a unique opportunity to empower Americans to become even more generous givers. Adopting FGAs is an easy fix that would yield benefits for generations to come.
