Minnesota nonprofits and foundations are backing federal legislation that would offer a tax incentive encouraging more people to donate to charities.
The Charitable Act, recently introduced by 11 Republican and Democratic U.S. senators — including Minnesota Sen. Amy Klobuchar — would restore the expired deduction for charitable giving passed during the COVID-19 pandemic for the nearly 90% of taxpayers who don't itemize their tax returns.
It would allow those who take the standard deduction to deduct some charitable donations starting next year, when they file their 2023 taxes.
"It shouldn't just be big donors who are able to access incentives for charitable giving," Klobuchar said last week. "People who are donating their hard-earned resources to charitable causes should see this same tax benefit."
Taxpayers who didn't itemize were able to deduct some charitable contributions on their federal tax return during the pandemic thanks to the legislation in 2020 that was extended into 2021.
The bill — supported by several Minnesota nonprofits, the Minnesota Council of Nonprofits and Minnesota Council on Foundations — would restore the so-called "universal charitable giving deduction" and raise the cap for individual filers from $300 to about $4,600. For joint filers, the cap would go up from $600 to $9,200.
That means a taxpayer taking the standard deduction also would be able to take the charitable deduction, all the way up to a third of the standard deduction. Nonprofit leaders say that the change could spark more contributions at a critical time.
While nonprofits in Minnesota and across the nation saw a surge in generosity during the pandemic, the number of donors since has waned even as nonprofits face higher costs because of inflation and increased demand for food assistance and other key services.
Minnesota is one of only three states with a nonitemizer deduction for some charitable contributions. In 1999, it became the first state to pass a state-level tax deduction, allowing residents to deduct half of their charitable contributions over $500. About 660,000 Minnesota taxpayers claimed the deduction for tax year 2021.
Jeremy Wells, senior vice president of philanthropic services at the St. Paul and Minnesota Foundation, said Minnesota taxpayers would find the federal change to be more generous than the state's deduction. Although large foundations such as his group draw support mostly from wealthy philanthropists and wouldn't see as much of an impact, Wells said the federal tax incentive could be a game-changer for smaller foundations and nonprofits.
"It is meant to democratize the charitable deduction in a much more meaningful way, making it more available to more and more people out there — not just the ultra-high net worth [earners] that are giving more money away and making more money," Wells said.
'Just makes sense'
The bipartisan bill was introduced Feb. 28 in Congress by Sen. James Lankford, R-Okla., and was co-sponsored by Klobuchar and nine other senators. The bill has not yet been introduced in the House.
A similar bill introduced in 2021 didn't pass, but Klobuchar said this year's bill has broad bipartisan support.
"It just rewards giving, which is what we've always believed in in Minnesota," she said. "Whatever charity or religious institution that you want to give to, you should be able to have some benefit and it shouldn't matter if you itemize your taxes or not. That just makes no sense to me."
Several local nonprofits signed on to a Charitable Giving Coalition letter backing the bill, ranging from the Greater Twin Cities United Way to the Winona Community Foundation. Nancy Brown, CEO of the Winona Community Foundation, said the change would make charitable tax deductions more equitable.
"Fewer and fewer people itemize, so the people who are making less money may be giving a higher percentage of their income to charity, but they're not getting any kind of tax benefit for doing that," she said. "By implementing [this] ... you're recognizing that charitable giving at any level is important."
Many donors are inspired to give in support of a nonprofit's mission, but the tax deduction is a bonus, Brown said. According to the Fundraising Effectiveness Project, donations of $300 rose by 7.5% from 2019 to 2021, while donations of $600 jumped by 5% when charitable deductions temporarily were expanded to nonitemizers.
Calculations of the cost of lost taxes weren't available yet, but the 2021 bill that failed to pass estimated the cost at $2.9 billion, said Matthew Evans, senior director of public policy at the Washington, D.C.-based United Philanthropy Forum. However, he said, that tax deductions would have stimulated far more economic growth.
Evans added that the nonprofit sector had pushed in vain for a universal charitable deduction for years before the pandemic. The temporary deductions finally enacted in 2020 showed that the tax incentive was worthwhile and helped build momentum for this year's legislation.
Donations drop off
In a letter to the U.S. senators, the National Council of Nonprofits said more than 42 million households used the nonitemizer charitable deduction in 2020, adding up to nearly $11 billion in donations. About a quarter of those taxpayers made less than $30,000.
The council noted that donations declined after the 2017 Tax Cuts and Jobs Act nearly doubled the standard deduction, leaving only about 12% of taxpayers itemizing their tax returns. Instead of pushing affluent taxpayers to be more philanthropic, donations went down, the council said.
"To the extent that those large standard deduction limits discouraged people from making contributions because they no longer had tax benefits, this could bring them back again," said John Wilgers, CEO of the Greater Twin Cities United Way, which receives about half its contributions from individuals. "[Donations] are a really important form of civic engagement, so it's one way that people engage with our community."
In Bemidji, almost all donations to the Northwest Minnesota Foundation that supports rural community projects are less than $5,000. Without a tax incentive for donors, smaller nonprofits in rural areas potentially are losing out on significant contributions, said Nate Dorr, the foundation's vice president for advocacy.
"Being able to provide a tax incentive for smaller donors helps us make projects happen in communities," he added.
In St. Paul, the number of visitors to the Science Museum of Minnesota hasn't rebounded to 2019 levels. Yet the museum's expenses have risen as the amount of donations has declined.
"That kind of boost of being able to deduct it, we know has an impact on people's giving," Science Museum CEO Alison Rempel Brown said. "It's just that bit of a reminder."