Charitable Deduction Reform Could Raise Revenues and Increase Giving

We estimate reforms to charitable tax deductions could generate $20 billion while increasing giving, or $115 billion with little impact on giving, based on a new study from the Tax Policy Center.

As a result of the One Big Beautiful Bill Act (OBBBA), there are currently three major charitable tax deductions with different sets of rules. These include: 1) an itemized charitable deduction, only available for those who do not take the standard deduction, with a 0.5% of Adjusted Gross Income (AGI) floor on what giving is deductible; 2) an above-the-line deduction, only available for those who don’t itemize, capped at $1,000 ($2,000 for married) per year with no floor; and 3) a corporate charitable deduction with a 1.0% of AGI floor.

CRFB board member Eugene Steuerle, Robert McClelland, and Nikhita Airi of the Tax Policy Center propose merging the two individual deductions into a single Universal Charitable Incentive (UCI) – an uncapped above-the-line deduction with a single percent-of-AGI floor. The authors ran estimates of the theoretical impact in 2026 under different floors.

Using TPC’s estimates as a starting point and applying the same floors to corporations, we estimate a UCI with a 1.5% of AGI floor could generate $20 billion over a decade while substantially increasing individual charitable giving by improving the marginal incentive to give. We estimate a 2% of AGI floor would generate $115 billion with little net impact on individual giving.

Revenue Impact of Charitable Deduction Reform (FY2027-2036)

Totals rounded to the nearest $5 billion.
Source: Committee for a Responsible Federal Budget based on Congression Budget Office and Tax Policy Center.
 

There are of course other options to reduce the cost of the charitable deduction – including imposing the floor while keeping the non-itemized deduction, restricting the ability of taxpayers to take a “double deduction” on the donation of appreciated assets, limiting the value of the deduction for high earners, or replacing the deduction with a credit.

The advantage of the UCI approach is that it reduces the deductions cost by reforming the deduction to be simpler, easier to understand, more salient, and far more effective at encouraging charitable giving. Some versions of the proposal could significantly increase federal revenue and total giving at once.

As policymakers search for ways to reduce deficits and improve the nation’s fiscal outlook, they will need to consider many hard choices. When opportunities for win-wins arise, they should jump at the opportunity to consider them.