Why American Household Still Give to Charity Despite of Tax Reduction By Gregory Murmylyuk

While 96% of households give to charity, only third of them benefit from tax deduction.

The federal income tax was introduced in 1913 and four years later, tax deductions were established for charitable donations. There have been changes throughout the years, but one basic principle remains in action – taxpayers can make deductions to their taxable income from their donations to nonprofit organizations and charities.

             However, not all taxpayers can benefit from the deductions. When deductions were initially introduced, they were only available to a small number of Americans, those who had abundant funds. By 1945, the amount of people the deductions were offered to expanded to nearly 75% of the population and instead of all the deductions being listed separately, the IRS developed the “standard deduction”, which allows all filers to lower their taxable income by a fixed amount. This method saves everyone affected plenty of time and trouble; however, it also means that approximately 68% of the filers who use this method are unable to write off their deductions for charities. Current deductions for charitable contributions are only relevant to about 32% of American tax filers.

            For those who prefer to itemize deductions, the filer’s marginal income tax rate determines the amount of the government’s subsidy towards charitable donations. If the taxpayer is in the 35% bracket and donates $100 to a charity, the government will pay $35; whereas, if the taxpayer is in the 10% margin, he will receive $10. As a result of having a progressive income tax system, those who pay a larger percentage of their income towards taxes will receive more back in charitable deductions. While only about 7% of donating households have incomes of over $200,000, those households altogether contribute approximately 37% of the funds given to charities each year by individuals, as not only naturally do they have more money available but also the government covers a larger portion of their donations to charities.

            While this system can seem to be ‘unfair’, still 96% of American households (72% of individuals) give to charity. Total amount donated by individuals reached staggering $300B in 2013, which reminds us that tax deduction is not the primary reason on why people give.

Gregory Murmylyuk
CEO at Celebridge