In 2020 and 2021, all taxpayers will be able to take a $300 above-the-line deduction. This is good, but there is room to expand the policy to the benefit of taxpayers and their communities.
When I was in law school, my tax law professor said that the Internal Revenue Code was ultimately social engineering. Of course, the primary and stated purpose of the tax code is to collect taxes in order to fund the federal government, but his argument was clear: within that tax code there are numerous ways in which the government entices us to do certain things with our money. There are incentives to fund personal retirement accounts, rules about how much money one person can give another per year, taxes on estates, and, of course, the tax policy most often labeled social engineering, the Child Tax Credit, which is often in the news these days as politicians consider a massive increase.
Ultimately, my tax law professor was correct. Within the tax code, there are countless ways that the government incentivizes or disincentivizes taxpayers to do various things that are geared toward shaping our nation in a certain way. Those incentives ebb and flow as new presidents take office and new members of Congress put their fingerprints on our tax laws.
AN EQUITABLE DEDUCTION
One policy that has been getting more attention recently is the charitable tax deduction. For most of our nation’s history, tax benefits for charitable giving were exclusive to higher income earners that itemized their taxes instead of taking the standard deduction. This changed in 2020 with the CARES Act and has been extended and expanded in 2021 thanks to the COVID Relief bill in December. For now, all taxpayers can claim a $300 above-the-line tax deduction per person ($600 for married couples filing jointly) even if they do not itemize their taxes.
It is uncertain right now whether this above-the-line charitable deduction will become a permanent fixture of the tax code. That decision will be made based on the influence of the new Biden administration and the congressional leaders that write new tax laws this year. But considering that it is typically difficult to retract tax benefits, it is fair to say that it is likely that the above-the-line charitable deduction is here to stay.
Moreover, the deduction is a very nonpartisan idea that can be applauded by a hard majority of citizens and policy makers—something quite rare in our current hyper-partisan political climate. While I am cautiously optimistic that we will see the expanded charitable tax deduction in 2022 and beyond, I do fear that the policy is not as comprehensive and equitable as it could be.
EXPANDING THE DEDUCTION
With millions of Americans still unemployed and underemployed, the reality is that many people have time but not money to give to deserving nonprofits. And with some end of the pandemic in sight thanks to successful vaccine production and delivery, people will desperately want to get out into their communities—and there will be significant needs to be met, as well.
Considering this, lawmakers should strongly consider allowing time volunteered at nonprofit organizations to count toward the charitable tax deduction. For example, volunteer time could be valued at a rate of, say, $5 per hour. This would allow individuals without financial means to give their time instead of their dollars. Sixty hours of volunteer time throughout the year would add up to $300 in service to nonprofits, and the taxpayer could maximize the charitable tax deduction. This would also create a new vehicle for nonprofits to engage community stakeholders and donors like never before.
The positive personal and societal benefits of such a change in tax policy would be enormous. There are numerous studies that suggest giving financially improves happiness. Furthermore, volunteering one’s time has proven substantial health benefits, including decreasing the risk of depression and developing new meaningful friendships.
America already contains extraordinary nonprofit organizations that feed the hungry, shelter the homeless, and provide countless other services. Indeed, these organizations are quite arguably the modern-day associations that can help civil society flourish, not unlike the associations observed by Alexis de Tocqueville almost two centuries ago. We have a nonprofit organizational infrastructure that is doing important work, and we have millions of Americans anxious to give their time and money to make those organizations more effective. If there is ever a worthy reason to use our tax laws to encourage the public to take action, this should be it. The question now is whether or not policy makers will see the tremendous value in these organizations—and the civic engagement they can offer—and write new tax laws accordingly.