Do Tax Rules Still Favor Charity Over Social Welfare Donations?

Whether a taxpayer chooses to make a nondeductible contribution to a §501(c)(4) “social welfare” organization (that is, an organization promoting and lobbying for a cause) or a possibly deductible contribution to a “related” §501(c)(3) “charitable” organization, may partially depend on tax considerations. But ultimately, the choice may be determined by how a taxpayer views the importance of supporting the lobbying for a cause. Income tax rules restrict the political activities of charitable organizations and encourage the formation of independent, “social welfare” organizations to promote the charitable purpose. Passage of recent tax legislation reminds donors of the several factors they must consider when making a choice between donating to either type of organization and adds certain new factors.

Charity or Lobbying

Given the unpredictable ebb and flow of the political climate, lobbying for a charitable cause may be just as important as funding a charity itself. In many instances, a charity may be formed side-by-side with a politically oriented organization that advocates for laws and policies that are consistent with the charity’s purpose. Some charities name both organizations in their solicitations for funds.

A gift to charity may be claimed as an itemized deduction, but a contribution to a political organization may not. Not all taxpayers, however, are able to claim itemized deductions, including the one for charitable giving. Some taxpayers may only be able to claim a standard deduction, a circumstance that may make it easier to consider contributing to a lobbying organization instead of the associated charity. Some of the rules for claiming itemized deductions and charitable deductions are changing for this year and the following years, which may eliminate or increase the tax reasons for picking one type of organization over another.

Statutory Restrictions on Political Activities by Charities. An organization may qualify as a charity under §501(c)(3) of the Internal Revenue Code of 1986 provided it is organized and operated exclusively for religious, literary, educational, and certain other specified purposes. But having a charitable purpose does not mean operating freely. Among other limitations, to maintain its status as a §501(c)(3) organization, “no substantial part of [the organization’s] activities may consist of carrying on propaganda, or otherwise attempting, to influence legislation and it may not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.”

Because of this restriction, to avoid losing its status as a §501(c)(3) organization, many “charities” have “related” §501(c)(4) organizations, which may be operated exclusively for “the promotion of social welfare.” Although a §501(c)(4) organization cannot offer the benefit of a tax deduction to its contributors, provided it does not influence or attempt to influence the selection of an individual for federal, state, or local public office (Treas. Reg.§1.501(c)(4)-1(a)(2)(ii)), a §501(c)(4) organization is exempt from income tax and can engage in a substantial amount of lobbying activities and even some political activities without loss of its tax-exempt status. Rev. Rul. 2004-6.

Tax Consequences of Giving to a Charity or a Lobbying Organization. Except for the limited charitable deduction for non-itemizers, discussed below, a charitable deduction is “beneficial,” (that is, reduces taxes otherwise owed) only if it is claimed as an itemized deduction. A charitable deduction is of benefit provided the amount, together with a taxpayer’s other itemized deductions, exceeds the “standard deduction.” For tax year 2025, the standard deduction for married persons is $31,500 and for a single person is $15,750 , which means itemized deductions (mortgage interest, state and local taxes and charitable contributions) must exceed those amounts before any additional benefit is derived from claiming itemized deductions.

Because of the general and specific limitations imposed on claiming itemized deductions , the standard deduction may provide the most tax benefit. Given that the majority of taxpayers claim the standard deduction, this suggests that there is a substantial amount of money given to §501(c)(3) organizations but not claimed as a deductions and, therefore, could be given to a §501(c)(4) organizations without any tax detriment.

Presumably, individuals make charitable donations because they believe in the work of the recipient. And as a practical matter, tax exempt organizations are not tax shelters and making cash donations to them is not an income tax strategy. No one donates $1 for the sole reason of getting a deduction that may only save them $.37 in taxes. But if a taxpayer is no longer able to benefit from a charitable deduction, and if one believes that lobbying for a cause may also be important, then giving to a charitable organization’s related §501(c)(4) organization may be just as worthwhile as giving to the §501(c)(3) organization itself. Individual income tax returns filed for 2022 show $222.4 billion in charitable deductions claimed. IRS Pub. 1304 (rev. Jan 2025). Charitable giving for the same year was $499.3 billion. Giving USA 2023: The Annual Report on Philanthropy for the 2022 Year.

Impact of Recent Legislation on the Standard Deduction

Tax Years 2025 through 2028 Effected. Because of changes made by the legislation commonly referred to as the One Big Beautiful Bill Act, it may be easier for a taxpayer’s itemized deductions to exceed the standard deduction for taxable years starting in 2025 through 2028. For the next four taxable years, claiming these benefits as itemized deductions could mean exceeding the standard deduction and benefiting from a charitable deduction for a gift made to a §501(c)(3) organization.

The $10,000 limit on the deduction for state and local taxes has been increased to $40,000 for 2025 and to higher amounts in later taxable years, but is subject to a phase out. Only the dollar amount, not the types of state and local taxes that are deductible, are changed. The deduction is reduced by 30% of the excess (if any) of the taxpayer’s “modified adjusted gross income” over the “threshold amount,” which is $500,000 for 2025 and more in later taxable years.

For certain taxpayers, OBBBA has added a deduction of up to $10,000 for “qualified car loan interest.” Subject to phaseouts, individuals may deduct interest paid on a loan that originated after 2024 to purchase a passenger vehicle intended for personal use and its final assembly must have taken place in the US. The deduction is reduced by $200 for each $1,000 by which the taxpayer’s “modified adjusted gross income” exceeds $100,000 ($200,000 in the case of a joint return). In general, “modified adjusted gross income” means adjusted gross income but increased by amounts of certain foreign income that would otherwise be excluded under the Code.

Two New Deductions Under OBBBA: Qualified Tips, Qualified Overtime Compensation. “Qualified tips” are cash tips received by an individual in an occupation in which tips were customarily and regularly received, provided such practice started before 2025.

“Qualified overtime compensation” means overtime compensation paid to an individual required under §7 of the Fair Labor Standards Act of 1938 that is more than the regular rate at which such individual is employed. In general, the deduction for qualified tips is up to $25,000 but is phased out as modified adjusted gross income exceeds $150,000 ($300,000 in the case of a joint return). The deduction for qualified overtime income is up to $12,500 ($25,000 in the case of a joint return) but is also phased out as “modified adjusted gross income” exceeds $150,000 ($300,000 in the case of a joint return). Due to the possible wide application of these benefits, the government will hopefully provide clear guidelines written in plain English. Treasury has already started identifying occupations in which tips are customarily and regularly received. IR-2025-92.

Neither of these deductions should influence whether one claims the standard deduction or itemized deductions. If a taxpayer’s other deductions do not exceed the standard deduction, it is better to claim the standard deduction and take the deduction for qualified tips or qualified overtime compensation against gross income in arriving at “taxable income.” If a taxpayer is already claiming itemized deductions, then the deduction for qualified tips or qualified overtime compensation must be claimed as an itemized deduction.

Other Effects of OBBBA on Charitable Giving

After the passage of OBBBA, 2025 will be the best year to make charitable donations free of the new, specific limitation on charitable deductions and the new overall limitation on itemized deductions.

New Limits on the Amount of the §170 Charitable Deduction. A taxpayer itemizing their deductions also has a new floor on claiming a charitable deduction. After 2025,an individual may claim a charitable deduction only to the extent that it exceeds 0.5% of the individual’s “contribution base”, generally the adjusted gross income, for the year. So a taxpayer with a $1 million adjusted gross income could claim a charitable deduction only to the extent it exceeded $5,000. It is difficult to imagine a set of circumstances in which a person with that much income would be willing to donate but influenced by the limitation. But taxpayers with much higher incomes may be more substantially affected. Taxpayers may want to take advantage of 2025 where no such floor exists to make significant gifts or to fund donor advised funds if the taxpayer is not immediately certain of what organizations they would like to benefit from the gifts. For 2026 and later years, a taxpayer may want to postpone donations until a year in which sufficient gifts can be made to exceed the floor.

New Limitations on All Itemized Deductions. Prior to “The Tax Cuts and Jobs Act”, §68 imposed an overall limitation on itemized deductions known as the 3%/80% rule or Pease limitation. Individuals whose adjusted gross income exceeded certain inflation-adjusted designated amounts (for example, $300,000 in the case of a joint return and $250,000 in the case of an individual return) would have the amount of itemized deductions otherwise allowable for the taxable year reduced by the lesser of (1) 3% of the excess of adjusted gross income over their designated amount, or (2) 80% of the itemized deductions otherwise allowable for the taxable year. For example, a $100,000 itemized deduction would have been reduced by $3,000, which means the itemized deduction would have been reduced to $97,000, and the tax benefit to a taxpayer in the 37% bracket would have gone from $37,000 to $35,890.

TCJA made this Pease limitation inapplicable for taxable years beginning after December 31, 2017, and before January 1, 2026. If the TCJA amendments were allowed to expire in 2026 and had OBBBA not been passed, the Pease limitation would have resumed starting in 2026.

However, starting in 2026, OBBBA permanently repeals the Pease limitation and makes changes that generally have the effect of imposing a 2% tax on itemized deductions. These OBBBA changes will probably have more of an impact than the Pease limitation, especially in the case of charitable gifts. OBBBA reduces the amount of itemized deductions an individual can claim in a different way. In the case of an individual, the amount of the itemized deductions otherwise allowable for the taxable year (determined without regard to this limitation) is reduced by 2/37 of the lesser of (1) the amount of itemized deductions ,or (2) so much of the taxable income of the taxpayer for the taxable year (determined without regard to this limitation and increased by the amount of such itemized deductions) as exceeds the dollar amount at which the 37% rate under section 1 begins with respect to the taxpayer.

In very simplified terms, under these OBBBA mechanics, an individual paying $37,000 in tax for each $100,000 earned, will only be able to claim so much of a $100,000 charitable gift as will provide a deduction that saves $35,000 in taxes. As a result of the OBBBA changes, an individual in the 37% bracket will lose an additional $890 in tax benefits (a $35,890 benefit under the 3%/80% limitation that was scheduled to resume in 2026 less the $35,000 benefit that will now apply in 2026 under OBBBA).

Losing $890 in tax benefits for each $100,000 gift may affect the size of charitable contributions made by individuals in higher brackets. But whether the amount of any reduction in charitable deductions would be redirected to a §501(c)(4) organization would hinge on a donor’s view of whether that would be a better use of the gift.

Charitable Deduction Only for Non-itemizers. Section 170(p) of the Code provides a special charitable deduction for cash contributions made by persons that use the standard deduction and do not itemize . For tax years starting after 2025, the charitable deduction has been raised from $300 ($600 in the case of married persons filing a joint return) to $1,000 ($2,000 in the case of married persons filing a joint return). Like other non-itemizers, taxpayers taking advantage of §170(p) may also consider donating to a §501(c)(4) organization to the extent that their cash contributions to §501(c)(3) organizations exceed the §170(p) limits. In other words, once a donor has given §501(c)(3) organizations enough to claim the full benefit for charitable gifts under §170(p), if they are inclined to make additional gifts in furtherance of a cause, they can make those gifts to a §501(c)(4) organization without any tax detriment.

Conclusion

OBBBA has made it clear that the limitations imposed by the TCJA on itemized deductions, including the charitable deduction, are not going to sunset as originally written. OBBBA has, in fact, made those limitations even more stringent and has added additional limits on charitable deductions. Under these circumstances, it is worthwhile to weigh the benefit of a deduction for a gift to a §501(c)(3) organization and consider whether such gift may have more effect in the hands of a §501(c)(4) organization.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Dentons partner Marshall D. Feiring is a member of the firm’s US Capital Markets practice focusing on multiple aspects of the formation and operation of complex investment vehicles. The author would like to thank Ryan Zucchetto and Lawrence Salva for their thoughtful review and comments.

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