New $25 deduction is waste of Congress' time

Is it true that people who don't itemize their deductions can still take a deduction on their tax return for amounts given to charity? How does this work? E.A.- via email.

It's not true yet, but if the House of Representatives has its way, non-itemizing taxpayers will get to take a small deduction for amounts donated to charitable organizations. Last week the House passed legislation that will permit non-itemizers (people who don't file Schedule A with their tax return) to deduct up to $25 for amounts given to charities. Over the next 10 years this amount is scheduled to increase to $100.  

Now, no one likes a good tax deduction better than I do, so you might think I would be championing the cause of this new deduction that lets non-itemizing taxpayers have a bit of the fun that the itemizers have.  

But what is Congress really trying to accomplish? Do they want to encourage people to make more donations to charity? Do they want to make their constituents feel like their elected officials are helping Americans everywhere save money on their taxes? Neither one of these scenarios holds much water.  

First, consider the fact that most non-itemizing taxpayers pay tax in the 15% tax bracket. This means that in most cases the $25 deduction will provide a tax savings of approximately $4.  

In order to save that $4 in taxes, how many people who don't already donate to charities are going to be inspired to do so? Would you spend $25 to make $4? Maybe. Maybe not. My guess is that a lot of people might start making donations where they didn't before because they don't understand enough about the way in which tax is calculated to realize that they will only save $4 with the contribution. If this happens, one could say that the charities will benefit from this legislation. But is it truly a benefit if one has to dupe the American public in order to accomplish the task?  

Let's consider another factor. How likely is the IRS to perform audits of tax returns to see if the taxpayers are justified in taking the $25 deduction? Would a team of examiners be dispatched to make sure that $4 in tax savings is justified? Unlikely.  

You don't even need to save a receipt when your contribution is only $25. A taxpayer won't have to prove that a donation was made in order to take the deduction. Many taxpayers who realize this fact will take the $25 deduction without a second thought - whether a donation was actually made or not. After all, if there were any question about the validity of the deduction (which there won't be), you could simply state that you dropped cash in the Salvation Army bucket or gave cash to a door-to-door do-gooder who was collecting for some worthy cause. Who's going to know?  

Which brings me to my opinion of the current legislation. If you ask me, this type of legislation does nothing more than mollify the charitable organizations that are lobbying Congress to do something that will encourage more deductions. And the other thing this legislation will do is encourage tax abuse.  

Sure, there are plenty of honest taxpayers who wouldn't think of taking a deduction for money they didn't spend. In fact, many taxpayers who give donations in cash don't take deductions on their tax return because they can't prove they made the contribution, even though they don't have to be able to produce evidence until the contribution reaches $250.  

What this legislation really does is appeal to the ignorance of the American taxpayers who don't understand how insignificant a $25 deduction really is. Pass the law and the legislators who bestowed this great benefit upon the American people will come home and tell us how hard they are working for us.  

Meanwhile, many taxpayers will find they have a new loophole. Maybe they’ll only make $4 with this tiny deduction, but there are plenty of people who think it's worth a little white lie to keep $4 away from the federal government.  

Getting back to your original question, let me just add that this new legislation has been passed by the House of Representatives and is now headed for the Senate where it may meet a more difficult battle. Both chambers must reach agreement before the legislation would be presented to President Bush to be signed into law. Stay tuned for future updates.