Minnesota nonprofit organizations support federal charitable deductions for individuals who do not provide individual information
Minnesota nonprofits and foundations are supporting federal legislation that would provide a tax incentive that would encourage 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 charitable donation deduction that served nearly 90% of taxpayers during the COVID-19 pandemic who do not detail their tax returns.
It would allow those claiming the standard deduction to deduct some charitable donations starting next year when filing their 2023 taxes.
“It shouldn’t just be big donors who can access charitable giving incentives,” Klobuchar said last week. “People who donate their hard-earned resources to charity should get the same tax benefit.”
Taxpayers who didn’t provide details were able to deduct some charitable contributions from their federal tax returns during the pandemic thanks to the 2020 legislation, which was extended to 2021.
The bill — backed by several Minnesota nonprofits, the Minnesota Council of Nonprofits and the Minnesota Council on Foundations — would restore what is known as the “general deduction for charitable donations” and increase the cap for individual applicants from $300 to about $4,600. For joint filers, the cap would increase from $600 to $9,200.
This means that a taxpayer who takes the standard deduction can also take the charity deduction up to a third of the standard deduction. Nonprofit leaders say the change could spark more giving at a critical time.
While nonprofits in Minnesota and across the country have seen a surge in generosity during the pandemic, donor numbers have since declined, even as nonprofits face higher costs due to inflation and increased demand for food aid and other essential services.
Minnesota is one of only three states with a non-itemizer deduction for some charitable donations. In 1999, it became the first state to introduce a state-level tax deduction, allowing residents to deduct half of their charitable donations over $500. About 660,000 Minnesota taxpayers claimed the deduction for the 2021 tax year.
Jeremy Wells, senior vice president of philanthropic services at the St. Paul and Minnesota Foundation, said Minnesota taxpayers would find the federal change more generous than the state deduction. Although large foundations like his group are supported primarily by wealthy philanthropists and wouldn’t see as much of an impact, Wells said the federal tax stimulus could be a game changer for smaller foundations and nonprofits.
“It aims to democratize the charitable deduction in a much more meaningful way and make it more accessible to more and more people out there – not just the ultra-high net worth [earners] giving away more money and making more money,” Wells said.
“just makes sense”
The bipartisan bill was introduced in Congress on February 28 by Sen. James Lankford, R-Okla., and was co-sponsored by Klobuchar and nine other senators. The bill has not yet been tabled in the House.
A similar law, introduced in 2021, was not passed, but Klobuchar said this year’s law 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 you choose to donate to, you should be able to benefit from it, and it shouldn’t matter whether you list your taxes or not. That just doesn’t make sense to me.”
Several local nonprofits signed a letter from the Charitable Giving Coalition in support of the bill, 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 are providing details, so the people who are making less money may be giving a higher percentage of their income to charity, but they don’t get any tax benefits for doing so,” she said. “Through the implementation [this] … They realize that charitable giving matters at every level.”
Many donors are inspired to support a nonprofit’s mission, but the tax deduction is a bonus, Brown said. According to the Fundraising Effectiveness Project, donations of $300 increased 7.5% from 2019 to 2021, while donations of $600 increased 5% when charitable deductions were temporarily extended to non-individual contributors became.
Calculations of the cost of lost taxes weren’t yet available, but the 2021 law, which didn’t pass, estimated the cost at $2.9 billion, said Matthew Evans, senior director of public policy at the United Philanthropy Forum in Washington, DC. However, he said tax deductions would have stimulated far more economic growth.
Evans added that for years prior to the pandemic, the nonprofit sector pushed for a universal charity deduction to no avail. Eventually introduced in 2020, the temporary deductions showed that the tax stimulus paid off and helped give momentum to this year’s legislation.
Donations are cancelled
In a letter to U.S. Senators, the National Council of Nonprofits said more than 42 million households used the non-itemizer deduction to charity in 2020, equating to nearly $11 billion in donations. About a quarter of those taxpayers earned less than $30,000.
The council found that donations fell after the 2017 Tax Cuts and Employment Act nearly doubled the standard deduction, leaving only about 12% of taxpayers to itemize their tax returns. Instead of urging wealthy taxpayers to do more philanthropy, donations fell, the council said.
“To the extent that these high standard deduction limits have discouraged people from contributing because they no longer had tax benefits, this could bring them back,” said John Wilgers, CEO of Greater Twin Cities United Way, which produces about half of its Contributions received from individuals. “[Donations] are a really important form of civic engagement, so this is one way people can get involved with our community.”
In Bemidji, nearly all donations to the Northwest Minnesota Foundation, which supports rural community projects, are less than $5,000. Without tax incentives for donors, smaller nonprofits in rural areas may lose significant contributions, said Nate Dorr, the foundation’s vice president for advocacy.
“Being able to provide a tax incentive to smaller donors helps us deliver projects in communities,” he added.
In St. Paul, attendance at the Science Museum of Minnesota has not recovered to 2019 levels. But the museum’s expenses have increased as donations have declined.
“We know that kind of push of being able to pull it off has an impact on people’s giving,” said Alison Rempel Brown, CEO of the Science Museum. “It’s just a little reminder.”