Charitable Giving Tax Law

Okay, nobody wants to think about taxes any more than they have to, but if you play a role in raising money for charity, you may need to brush up on some basics to be sure that you stay on the good side of Uncle Sam.

Deductions for charitable giving have been affected by changes in the estate tax laws. This article provides advice for those seeking fundraising donations for capital campaigns of charitable organizations, public universities, and non-profit groups.

by Bob Martin (Assistant Vice Chancellor for Development The University of Tennessee at Chattanooga)

This is an issue that definitely has differing points of view.

According to the Independent Sector (“Policy Position on the Estate Tax,” 2001), Americans have provided generous support to charities for many years. In 1999, Americans gave over $190 billion to charitable causes. Charitable bequests for the year were approximately $15 billion.

Both sides on the debate regarding the changes in the estate tax law have legitimate concerns on this issue. The concerns of many charitable organizations faced with the possibility of loosing key funding are well understood.

However the first issue should be what motives individuals to give. Are charitable organizations doing an efficient job of educating the public on the positive impact their organization provides to society at large or even in their local community?

U.S. Trust (1998) reports that the two main reasons affluent individuals give to charity are the desire to provide support to worthy causes and a belief that those who have the good fortune to be financially successful have the responsibility to share.

Paul Schervish (2001) reported that repealing the estate tax would lead to greater national and individual economic growth. This growth could encourage giving as more of a volunteer act than one established merely because of tax incentives.

Repealing or restructuring the estate tax could enhance the quality of giving by having more dollars available for giving to charity. More major gifts could be made during an individual’s life because there would be more funds available.

Eugene R. Tempel and Patrick M. Rooney (2000) wrote that many people believe that the estate tax is a punishment for success or a tax on being lucky. If the individual who created the wealth is paying the tax then the estate tax could be viewed on being a punishment for success. Since the heirs pay the tax it may be viewed as a tax on those lucky enough to have been born to financially successful parents.

Reducing the estate tax will benefit more than just the wealthiest Americans. Sometimes businesses or farms must be sold to pay estate taxes. When businesses are sold, jobs are lost. Repealing the estate tax could mean more employment and greater job security (“Estate Tax Repeal,” 1999).

A poll in the Chronicle of Philanthropy (2001) indicated that 73% of wealthy individuals stated the repeal of the estate tax would not change their behavior of contributing to charity. Wealthy, small business owners and those who gained their wealth through stock options were more likely to be swayed by tax incentives than those who acquired their wealth by other means.

Edward Cohn (2000) reported on how the critics of the estate tax claim its repeal would lead to an increase in charitable giving. The simplest explanation is that if American’s wealthiest individuals do not have to give a large amount of their estate to the government then they would be more likely to give some of their savings away.

However, he goes on to show how the estate tax can benefit charitable organizations. The estate tax lowers the cost of leaving money to charity. For example, when a dollar is left to charity through an estate, the charity receives the full value of the dollar.

The value of the contribution is deducted from the taxable estate. When an individual in the top marginal tax bracket leaves a dollar to his/her children, they only receive 45 cents because of the 55% tax rate.

The Council for Advancement and Support of Education (2001) supports a mending of the estate tax. They cite the tradition of philanthropy in the United States that was built around tax laws that encourage charitable giving.

The repeal of the estate law could affect this tradition of support. While the main motivation for donors is the desire to support a worthy cause, each individual has several factors that motivate them to give.

According to Schwinn (2001) in “Nonprofit Coalition Takes Stand on Tax Issues,” nonprofit groups are divided on if the estate tax issue should be a priority. Some do not have enough information on the effect of the estate tax to take a stand. Others believe that many donors will continue to give regardless of the loss of tax benefits.

Instead of concentrating on estate gifts, planned giving directors and other fundraisers could look at gifts that provide tax incentives during an individual’s lifetime.

Charities can look inwardly and decide if they receive donations because they provide a needed service or do they receive the majority of their contributions merely because they can provide a donor with a tax break.

This is an excellent opportunity for nonprofit organizations to make sure that they are fulfilling their mission of service and that their supporters and prospects are aware of the positive difference they are making.

Cohn, E. (2000, August). The Estate Tax and Charity. [11 paragraphs] Common Wealth [On-line] Available: [2001, July 23].

Estate Tax Position Q & A, (2001, July 23). Council for Advancement and Support of Education (CASE). [7 paragraphs] [On-line] Available: [2001, July 23].

Policy Position on the Estate Tax and Charitable Tax Bequests. (2001, March). [6 paragraphs] The Independent Sector [On-line] Available: [2001, July 23].

Tempel, E. and Rooney, P. (2000, November 1). Repeal of the Estate Tax, Its Impact on Philanthropy. [22 paragraphs] [On-line] Available: [2001, July 23].

For more information, please contact:
Bob Martin
Assistant Vice Chancellor for Development
The University of Tennessee at Chattanooga
Dept. 6806
615 McCallie Avenue
Chattanooga, TN 37403-2598
(423) 425-4233 fax (423) 425-4012