The Effects of Making the Charitable Deduction Above-The-Line

According to recent reports, lawmakers are considering a proposal that would allow all taxpayers to claim the charitable deduction, rather than just those that itemize. Currently, about 70 percent of U.S. households choose to take the standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act (TCJA) as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. , which means that they forgo the opportunity to deduct their charitable contributions. Under this proposal, the charitable deduction would become an “above-the-line” deduction, available to all taxpayers, whether or not they itemize.

This proposal is particularly relevant in the context of Republican taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. reform proposals that would cause fewer taxpayers to itemize their deductions. Both the House Republican “Blueprint” and the Trump administration proposal would greatly increase the standard deduction and eliminate many itemized deductions. These two changes would lead many taxpayers to choose to take the standard deduction instead of itemizing, which would decrease the number that claim the charitable deduction. The House Blueprint, for instance, specifically aims to reduce the number of taxpayers that itemize “to approximately 5 percent.”

For some, the fact that the House Blueprint would lead fewer taxpayers to claim the charitable deduction is a feature, not a bug. After all, a major goal of tax reform is to decrease the size and scope of deductions and other targeted provisions in the tax code, in order to broaden the tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. and lower marginal rates. However, others are wary of any tax changes that would reduce the usage of the charitable deduction, which could lead to fewer charitable contributions.

Making the charitable deduction into an above-the-line deduction would make it more widely available, but would also come with trade-offs. For one thing, doing so would reduce federal revenue, because more taxpayers would be able to reduce their taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. by deducting charitable contributions. We estimate that, under current law, making the charitable deduction above-the-line would reduce federal revenue by $191 billion over ten years.

Change in federal revenue from converting the charitable deduction to an above-the-line deduction (2017-2026)

Source: Tax Foundation, Taxes and Growth Model (March 2017 version). Estimates assume no change in household charitable giving.
In the context of current law	In the context of the House GOP Blueprint
-$191 billion	-$515 billion

In the context of the House Blueprint, the revenue loss from making the charitable deduction above-the-line would be even greater, $515 billion over ten years. This is because the overall structure of the House Blueprint would cause so many taxpayers to take the standard deduction and to stop claiming the charitable deduction. Thus, making the charitable deduction above-the-line would effectively restore the deduction for these taxpayers, which is why doing so would be so costly in the context of the House Blueprint.

These revenue estimates assume that modifications to the charitable deduction would not result in changes to household charitable giving levels. In reality, making the charitable deduction above-the-line would likely lead to higher charitable contributions by U.S. households, which means that the true cost of this proposal is probably higher than the estimates shown above.

Another trade-off associated with this proposal is that it would slightly alter the distribution of the federal tax burden. For instance, in the context of current law, making the charitable deduction into an above-the-line deduction would deliver the largest benefits to households in the top 1 percent, as well as to middle-income households. In the context of the House Blueprint, the benefits of making the charitable deduction above-the-line would be even more skewed toward high-income earners.

Change in after-tax income by quintile from converting the charitable deduction to an above-the-line deduction

Source: Tax Foundation, Taxes and Growth Model (March 2017 version). Estimates assume no change in household charitable giving.
	In the context of current law	In the context of the House GOP Blueprint
0% to 20%	0.01%	0.00%
20% to 40%	0.07%	0.11%
40% to 60%	0.16%	0.25%
60% to 80%	0.17%	0.35%
80% to 100%	0.14%	0.48%
90% to 100%	0.13%	0.47%
99% to 100%	0.20%	0.50%
ALL	0.14%	0.38%

One other interesting consequence of making the charitable deduction into an above-the-line deduction is that doing so would almost certainly lead to decreased usage of the home mortgage interest deductionThe mortgage interest deduction is an itemized deduction for interest paid on home mortgages. It reduces households’ taxable incomes and, consequently, their total taxes paid. The Tax Cuts and Jobs Act (TCJA) reduced the amount of principal and limited the types of loans that qualify for the deduction. . This is because, if the charitable deduction were no longer an itemized deductionItemized deductions allow individuals to subtract designated expenses from their taxable income and can be claimed in lieu of the standard deduction. Itemized deductions include those for state and local taxes, charitable contributions, and mortgage interest. An estimated 13.7 percent of filers itemized in 2019, most being high-income taxpayers. , fewer households would decide to itemize. As a result, fewer households would claim the home mortgage interest deduction.

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