Why Charitable Deductions Don’t Work

In Donald Trump’s most recent “Tax Proposal” a big component of it is the elimination and streamlining of individual tax brackets from 7 to three.  Under Trump’s tax plan there would be three progressive tax rates of 10%, 25% & 35%.  There would also occur the doubling of the standardized deduction for individuals and married couples as well as the elimination of all tax deductions except for mortgage interest and charitable deductions.  There is one key reason the charitable deduction in this plan is grossly unfair to middle and working class taxpayers.

Philanthropic giving in the United States is a multi-billion dollar industry with over $42 billion dollars in charitable giving in 2015 (the most recent year on record).  Under IRS rules any nonprofit, foundation or charitable trust is required by federal law to disperse at least 5% of their total assets annually to maintain their nonprofit and tax exempt status.  So the question is how does this apply in Trump’s tax plan?

87% of all income earners that make less than $250k take the standardized deduction and would pay the 25% tax bracket.  Earners in the top tax bracket which make up the proposed 35% tax rate would automatically be getting at least a 5% reduction in taxable income if their “income” comes from a qualifying foundation or trust.  Do the math and the tax rates for the top 2 tax brackets become almost equal absent any mortgage interest deduction difference as well.  

The reality is that the charitable and mortgage interest deductions are wealthy family provisions that have a disproportionate affect on tax revenues.
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