Senate Hearing Puts Charitable Tax Incentives in Spotlight

The Senate Finance Committee’s hearing yesterday on charitable giving and trends in the nonprofit sector highlighted the importance of tax incentives in encouraging charitable giving. At Philanthropy Roundtable, we have seen the crucial impact that American generosity has for all our communities. That’s why we support S. 618, the Universal Giving Pandemic Response and Recovery Act. This bipartisan bill, led by Sens. Lankford and Coons, along with numerous co-sponsors, is exactly the kind of legislation needed to support the charitable sector. As Chairman Wyden said in yesterday’s hearing, “The charitable tax deduction is a lifeline, not a loophole.”

In a time of pandemic recovery, international crisis and economic struggles at home and abroad, Americans are stepping forward to help those in need. This bill is crucial to ensuring our nation’s generous spirit continues to grow and thrive by allowing a deduction for charitable contributions for taxpayers who do not otherwise itemize their tax deductions.

The bill in its entirety is a positive for those who care about our vibrant charitable landscape, the donors who support it and all of us who benefit from the important work of charities today. We have seen the vital impact of prior universal charitable deduction measures. Included in the 2020 Coronavirus Aid, Relief, and Economic Security (CARES) Act, a version of this temporary tax benefit applied to tax-year 2020. Then the Taxpayer Certainty and Disaster Tax Relief Act of 2020 generally extended it through the end of 2021. Thanks in part to these measures, charitable giving reached a record high of $471.44 billion in 2020, according to Giving USA’s 2021 report. Other data show significant increases in smaller gifts. The Fundraising Effectiveness Project found that gifts under $250 grew by 15.3% in 2020 compared to 2019 and noted a 28% increase in $300 gifts on December 31, the exact amount allowed for a deduction under the prior measure. 

As earlier temporary universal charitable deduction measures expire, S. 618 offers even more encouragement for charitable giving. By allowing donor-advised fund (DAF) gifts to be eligible for a deduction, the bill appropriately acknowledges the key role that DAFs play in this landscape. 

Why encourage giving through DAFs? 

Unfortunately, one theme that emerged briefly in the hearing is that donors are “tucking away” funds in DAFs and not distributing funds to charities quickly enough. One senator even claimed 35% of DAFs didn’t make a single contribution in 2020, citing a study we have discussed here before. The same report, out of the Council of Michigan Foundations, found most of the DAFs (86%) made a grant in at least one of the four years of the study and less than 10% of all Michigan DAFs were inactive in every year of the study.

We know DAFs are so popular in part because they allow Americans to commit funds to charitable giving immediately and distribute the resources how and when the donors see a need. 

According to data from the National Philanthropic Trust for the 2020 fiscal year, DAF donors stepped up in a year of pandemic, social and economic crises. Grants out of DAFs rose to $34.67 billion from $27.29 billion, an astounding 27% in 2020 compared to the prior fiscal year. Contributions into DAFs rose as well, by 20.6%. 

These numbers illustrate America’s rainy-day fund in action as donors increased the amounts distributed out of DAFs to charities at a higher rate than they increased their giving into DAFs – all of which is irrevocably dedicated to charitable giving. Had they been forced to pay out in prior years according to an arbitrary timeline, this response would not have been possible. 

While DAF donors meaningfully increased their already high payout rates during 2020 to nearly 24%, we are already facing new economic challenges. Our communities have needs now and will face new, unpredictable problems in the future. Allowing donors to continue growing charitable assets while also paying out at strong rates is one of the most powerful features of DAFs as a giving vehicle.  

With the growing popularity of DAFs as a tool for giving, the associated tax benefits should not be limited to those who itemize tax deductions. All generous Americans should be allowed to deduct charitable giving through DAFs. 

Now, more than ever, it is vital to foster the generosity of Americans and support our charitable sector as it works to address the significant challenges before us.