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The Case for Limiting the Estate and Gift Tax Charitable Deductions

Posted on Nov. 1, 2021
[Editor's Note:

This article originally appeared in the November 1, 2021, issue of Tax Notes Federal.

Edward A. Zelinsky
Edward A. Zelinsky

Edward A. Zelinsky is the Morris and Annie Trachman Professor of Law at Yeshiva University’s Benjamin N. Cardozo School of Law.

In this article, Zelinsky argues that all large estates should support the federal treasury and that Congress should limit the estate and gift tax charitable deductions to ensure that they pay some tax.

If enacted into law, the legislation recently approved by the House Ways and Means Committee1 would make important changes to the federal estate and gift taxes. However, that legislation omits one compelling proposal: limiting the estate and gift tax charitable deductions.2 This change would ensure that all large estates pay some estate tax to the federal treasury.

The estate3 and gift4 tax charitable deductions are today unbounded. If a decedent with an otherwise taxable estate5 leaves everything to charity, no federal estate tax is due. In this situation, the unlimited charitable deduction eliminates the estate tax that, in the absence of that deduction, would have been payable on this affluent individual’s death.

In contrast, the Internal Revenue Code caps the federal income tax charitable deduction to a percentage of an individual taxpayer’s adjusted gross income.6 If in any year an individual donates to charity an amount equal to his total AGI for that year, he still owes federal income taxes because the income tax charitable deduction is limited to a portion of the taxpayer’s AGI.

The limits of the income tax’s charitable deduction reflect a durable compromise of offsetting considerations. These countervailing considerations include revenue concerns, the importance of all taxpayers assisting the federal fisc, the public benefits received by taxpayers who donate to charities, and the desirability of incentives for charitable giving. This balance of competing considerations also applies in the context of the estate and gift taxes and suggests that these taxes’ charitable deductions should be restricted similarly. All large estates should provide some support to the federal treasury. As the process of reforming the federal estate tax unfolds, Congress should amend the code to limit the estate and gift tax charitable deductions and thereby ensure that all sizable estates pay some tax.

Income Tax Charitable Deduction

Central to the code’s limits on the income tax’s charitable deduction is the distinction between public charities and private foundations.7 The code provides8 that an individual9 taxpayer can deduct charitable contributions in any year up to 60 percent of the taxpayer’s AGI10 if the donees are public charities.11 If an individual donates to private foundations, she can deduct those donations to the extent of 30 percent of her AGI.12 If in any year a taxpayer contributes to charities more than the statutory limits permit the taxpayer to deduct, the excess income tax deduction carries over for five years.13

Another important feature of the income tax’s charitable deduction limits is the distinction between cash contributions to charitable donees and in-kind contributions of property such as stocks, bonds, and real estate. If an individual taxpayer’s charitable contribution takes the form of donated property (as opposed to cash), the deduction’s limits are reduced. If an individual donates “capital gain property” (rather than cash) to public charities, the charitable deduction limit is lowered from 60 percent to 30 percent of the individual’s AGI,14 subject again to a five-year carryover.15 If a taxpayer donates “capital gain property” to one or more private foundations, the charitable deduction limit is decreased further from 30 percent to 20 percent of the taxpayer’s AGI,16 subject again to a five-year carryover.17

The limits on the income tax’s charitable deduction balance various competing considerations. A central defense of the charitable deduction is that it is an incentive to make charitable contributions. This characterization of the charitable deduction underpins the classification of the deduction as a “tax expenditure” — that is, as a feature of the tax law that subsidizes taxpayers’ charitable contributions as would an equivalent direct expenditure program.18 Viewing the income tax charitable deduction as an incentive for charitable giving bolsters the case for an unlimited deduction because an uncapped deduction provides greater immediate assistance to some potential donors than does a capped deduction.

Consider in this context an individual with an annual AGI of $1 million who is considering a lump sum cash gift to a public charity of $1 million. An unlimited charitable deduction would encourage this full gift by eliminating the taxpayer’s federal income tax obligation if she makes the contemplated gift. Today, the 60 percent limit on the charitable deduction instead leaves this individual (after the planned $1 million contribution) with taxable income of $400,000 and a consequent federal income tax obligation of $140,000.19 Some donors confronting this situation will reduce their charitable donation from the contemplated $1 million to offset some or all the federal income tax resulting from the 60 percent deduction limit. Those same donors might be more inclined to donate the full $1 million if that contribution could eliminate their federal income tax obligations.

An alternative argument for an unlimited charitable income tax deduction is that such an uncapped deduction more accurately reflects the taxpayer’s income. Instructive in this context is professor William Andrews’s argument that the charitable deduction isn’t a subsidy for charitable contributions, but rather accurately measures the taxpayer’s net income.20 Andrews’s analysis started from what is frequently denominated as the Haig-Simons definition of income.21 Under this definition, the taxpayer’s income in any year is the sum of his consumption and savings in that year. Andrews argued that resources devoted to charitable purposes are neither consumed by the taxpayer nor saved by him. The charitable deduction thus properly removes these contributed amounts from the tax base by reducing the taxpayer’s taxable income. From this vantage point, the taxpayer with AGI of $1 million in any year who donates $1 million to charity in that year should be able to deduct that entire amount because that $1 million is neither consumed by nor saved by the taxpayer. Thus, that $1 million should be removed from the income tax base through the charitable deduction.

Others would retort that a charitable donation is a form of consumption, ultimately indistinguishable from the taxpayer’s expenditures for food, clothing, or any other personal living choice.22 From this perspective, the code should provide no income tax deduction for charitable contributions because those donations are no different from other nondeductible personal living expenses.23

A variant of this perspective reflects the distinction between public charities and private foundations. In contrast with contributions to private foundations, donations to public charities look more altruistic since these donations go to institutions governed by independent boards such as universities and hospitals. Private foundations are typically directed by the donor’s family. Donations to private foundations thus have greater dynastic and consumption-like qualities because a private foundation is a source of power and influence for the donor and his family. Hence, the argument goes,24 contributions to private foundations are less worthy of deduction than are contributions to public charities, leading to lower deduction limits for both cash25 and in-kind26 contributions to private foundations.

These offsetting themes overlap with such traditional tax policy criteria as ability to pay27 and public benefits.28 From Andrews’s perspective, the individual who, in any year, donates all his income to charity has no ability to pay in that year. All his resources have been channeled to charity. The rejoinder is that the consumption-like act of channeling income to charity indicates the donor’s ability to pay tax. This argument may be coupled with the observation that the donor received significant public benefits. Government-provided social overhead assisted both the taxpayer’s earning of the donated income and his subsequent contribution of that income to the charitable sector — a sector that itself benefits from the same publicly provided social overhead.

Professor Lawrence Zelenak, invoking the concept of “fiscal citizenship,”29 focuses on the desirability of having all members of a society, including low-income individuals, participate in the support of the society through tax payments. Recent discussion30 suggests that the fiscal citizenship contribution of many of our society’s richest individuals is relatively small, considering their wealth-based abilities to pay and the value of the public benefits supporting their wealth-generating activities. Here, the retort is that contributions to charity do reflect fiscal citizenship because the donor renounces resources for himself and instead directs them to entities and activities benefitting the greater good.

The notion of fiscal citizenship helps to explain the code’s lower-income tax deduction limits31 for in-kind charitable contributions of property as opposed to cash donations. The taxpayer who sells appreciated stock and then donates the resulting cash to charity pays tax on that sale of stock.32 On the other hand, the taxpayer who contributes stock directly to charity avoids this tax by eschewing a sale.33 A larger charitable deduction limit for the first taxpayer, who paid tax and then contributed cash, reflects the individual’s fiscal citizenship act of paying income tax on the sale of the stock. The second taxpayer sidestepped this act of fiscal citizenship by donating his stock directly to charity. The code accordingly imposes on him a lower charitable deduction limit.

Finally, tax policy is about revenue. Revenue considerations reinforce charitable contribution deduction limits that require taxpayers to pay more tax than they otherwise would.

Section 170(b)’s limits on the deductibility of charitable contributions are best understood as compromising among those offsetting considerations. Like most compromises of this type, the limits of the charitable deduction embody arbitrary and contestable decisions. There is, for example, no magic to the various percentages incorporated into section 170(b).

However, the compromises embedded in section 170(b) have proven durable. These compromises are sensible in light of the relevant and competing concerns and should be replicated in the context of the estate and gift tax charitable deductions.

Estate and Gift Tax Deductions

In contrast with the various limits on the income tax deductibility of charitable contributions, the estate and gift tax charitable deductions are unbounded.34 The difference in statutory policies is stark: A taxpayer who, while alive, donates to charity all of his AGI pays federal income tax. A taxpayer who, at death, donates his entire estate to charity pays no federal estate tax.

The same kind of considerations at play in the context of the income tax charitable deduction are at play in the context of the estate and gift tax charitable deductions, starting with a central rationale for permitting a deduction for charitable deductions: incentive effects. The estate and gift tax charitable deductions, like the income tax’s charitable deduction, gives an incentive to decedents with large estates to leave their resources to charity.

The counterargument starts with the strongest rationale for the federal estate tax: Much wealth transmitted at death takes the form of appreciated property on which the decedent, while alive, paid no income tax because the property wasn’t sold or exchanged during the decedent’s lifetime. The decedent’s heirs also don’t pay this income tax because they receive a stepped-up basis on the inherited property.35 This stepped-up basis permanently eliminates from the federal income tax base the gain that accrued during the decedent’s lifetime.36 The estate tax can be understood as requiring the decedent on death to retrospectively make the contribution to the federal treasury, which he avoided during his lifetime by not selling his stock.

From that perspective, even if the decedent gives away all his gross estate to charities, his estate should pay some estate tax to retroactively defray the costs of the social overhead that helped the decedent accumulate his wealth while alive. Hence, the code should limit the estate tax charitable deduction to ensure that, even if the decedent leaves all his resources to charity, some estate tax will be due to the federal treasury. The payment of estate tax is the decedent’s final act of fiscal citizenship. The gift tax charitable deduction must also be limited to prevent the avoidance of estate tax through lifetime donations.

Consider in this context the Bill and Melinda Gates Foundation, which has received significant donations of appreciated Microsoft stock from Bill and Melinda Gates as well as large contributions of appreciated Berkshire Hathaway shares from Warren Buffett. I am a fan of the Gates-Buffett Giving Pledge,37 but neither Gates nor Buffett has personally contributed adequately to the federal treasury for the social overhead that assisted them in accumulating their personal fortunes. By not selling their Microsoft and Berkshire Hathaway shares, they pay no income tax on the substantial appreciation of those shares. When they donate those appreciated shares directly to the Gates Foundation, the unlimited gift tax charitable deduction guarantees that no contribution to the federal treasury is due then either. That result — no federal tax ever owed — is troubling considering criteria such as the taxpayer’s ability to pay, the public benefits the taxpayer receives, the federal government’s revenue needs, and the premise of fiscal citizenship, which is that everyone should properly contribute to the public fisc.

The retort is that donating one’s assets to charity is an act of fiscal citizenship. From that perspective, Gates and Buffett act commendably when they contribute their appreciated stock to the Gates Foundation, from whence it goes to the greater good. There is considerable force to this rejoinder.

But here again there are countervailing considerations. The Gates Foundation is a private foundation, controlled by Gates and, until recently, Buffett.38 Private foundations are a source of power and influence for those who control them, a fact reinforced by the controversy surrounding the governance of the Gates Foundation in connection with the Gates’s impending divorce.39

A further consideration in this context is the rise of donor-advised funds.40 While such funds are sponsored by public charities, they are de facto controlled by the donor and his family just as private foundations are. To date, Congress hasn’t extended to donor-advised funds the full regulatory regime that applies to private foundations.41 Thus, a wealthy donor who leaves his family a donor-advised fund bequeaths to them considerable power and influence, less constrained than had he instead created a private foundation.

And reinforcing the case for limits on the estate and gift tax charitable deductions are the revenue considerations of the federal treasury.

In the case of the income tax, the offsetting concerns have led to a durable compromise under which a deduction is granted for charitable contributions, subject to limits that guarantee that taxpayers who contribute to charities simultaneously pay something to the federal fisc. These offsetting considerations indicate that Congress should similarly constrain the estate and gift charitable deductions. Such limits would leave in place an incentive for charitable donations but would also ensure that all large estates make some payment to the federal treasury.42

Designing the Limits

The devil, it is said, is in the details. In this setting, the details start with whether the distinction between private foundations and public charities, central to section 170(b) of the income tax, should carry over to the limits I propose for the estate and gift tax charitable deductions. I think that the distinction between public charities and private foundations should apply in the estate and gift tax contexts.

Even a worthy private foundation entails power and influence for the donor and her family. Some private foundations aren’t so worthy. There is no guarantee that public charities will be well-governed and properly operated. However, charitable institutions with independent governing boards are, as their label implies, more “public” than private foundations.

Section 170(b)’s distinction between public charities and private foundations and that section’s more generous deduction limits for contributions to the former are now long-standing. That policy should be replicated in the estate and gift taxes by providing greater deduction limits for contributions to public charities.

Important in this context is the rise of donor-advised funds as effective substitutes for private foundations.43 Given the functional equivalence between private foundations and donor-advised funds, contributions to such funds should be subject to the same gift and estate tax limits as apply to donations to private foundations.44

The next details are the exact numbers of these proposed limits. Like the specific percentages of section 170(b), there is no magic to be invoked in constructing the proposed caps for the estate and gift tax charitable deductions. For incentive reasons, I am inclined to suggest relatively generous deduction limits for donations to public charities; for example, permitting an estate to deduct up to 70 percent of its value for contributions to public charities. I would provide considerably less incentive (and thus a lower deduction limit) for contributions to private foundations and donor-advised funds.

The legislation approved by the House Ways and Means Committee suggests another possibility in this context. That legislation would impose a 3 percent tax surcharge on high incomes.45 A similar surcharge could be imposed on especially large estates, for example, an additional tax of 10 percent on estates worth over $50 million. Besides raising additional revenue, such a surcharge would provide further incentive for charitable deductions even as the deduction is limited to a percentage of the decedent’s estate.


A balance of competing considerations underpins the durable limits of the income tax charitable deduction. Those considerations suggest that the estate and gift taxes’ charitable deductions should also be restricted. All large estates should provide some support to the federal treasury. As the process of reforming the federal estate tax proceeds, Congress should amend the code to limit the estate and gift tax charitable deductions and thereby ensure that all sizable estates pay some tax.


1 Build Back Better Act, H.R. 5376, sections 138207-138210, inclusive. These proposed changes to the estate and gift taxes include the reduction of the unified credit effective as of January 1, 2022, the curbing of valuation discounts, and the inclusion of grantor trusts in the decedent’s gross estate.

2 See Edward A. Zelinsky, “Why the Buffett-Gates Giving Pledge Requires Limitation of the Estate Tax Charitable Deduction,” 16 Fla. Tax Rev. 393 (2014).

5 For 2021 the unified credit exempts from federal estate taxation taxable estates of $11.7 million or less. Rev. Proc. 2020-45, 2020-46 IRB 1016, section 3.41. Thus, the charitable deduction effectively applies to taxable estates greater than this amount.

7 Section 170(b)(1)(A) and (B). On the distinction between public charities and private foundations, see Zelinsky, “A Response to the Initiative to Accelerate Charitable Giving,” Tax Notes Federal, Feb. 1, 2021, p. 755, 756-758; Daniel N. Belin, Charitable Foundations: The Essential Guide to Giving and Compliance 11-12 (2015); Brian Galle, “The Quick (Spending) and the Dead: The Agency Costs of Forever Philanthropy,” 74 Vand. L. Rev. 757, 766-767 (2021); Ray D. Madoff, “The Five Percent Fig Leaf,” 17 Pitt. Tax Rev. 341, 343-346 (2020); Ellen P. Aprill, “The Private Foundation Excise Tax on Self-Dealing: Contours, Comparisons, and Character,” 17 Pitt. Tax Rev. 297, 298 (2020); and Lloyd Hitoshi Mayer, “The ‘Independent’ Sector: Fee-for-Service Charity and the Limits of Autonomy,” 65 Vand. L. Rev. 51, 87 (2012).

8 Section 170(b)(1)(A) and (G)(i). This limit is scheduled to revert to 50 percent of the taxpayer’s AGI as of January 1, 2026. Id. In the face of the pandemic, Congress suspended the deduction limit for cash donations to most public charities made in 2020 and 2021. See Coronavirus Aid, Relief, and Economic Security Act, section 2205, and Consolidated Appropriations Act, 2021 (P.L. 116-260), Div. EE, Title II, section 213.

9 A corporation may deduct its charitable contributions to the extent of 10 percent of the corporation’s taxable income. Section 170(b)(2)(A).

10 For this purpose, the donating taxpayer’s AGI is determined by ignoring any net operating loss carryback. See section 170(b)(1)(H) (defining a taxpayer’s “contribution base” as her AGI ignoring any NOL carrybacks).

11 For these purposes, some private foundations (including operating foundations) and agricultural research organizations are grouped with public charities. Section 170(b)(1)(A)(vii) and (ix).

18 Madoff, supra note 7, at 344-345.

19 This example assumes that the individual has no other deductions or income and pays income tax at the 35 percent bracket. See section 1(j).

20 William D. Andrews, “Personal Deductions in an Ideal Income Tax,” 86 Harv. L. Rev. 309, 344 (1972).

21 Kathleen DeLaney Thomas, “Taxing Nudges,” 107 Va. L. Rev. 571, 611 n. 203 (2021); Joseph Bankman et al., Federal Income Taxation 52 (2018).

22 Zelinsky, supra note 2, at 420-421.

24 Zelinsky, supra, note 2, at 420-422.

27 Bankman et al., supra note 21, at 50-51.

28 Louis Kaplow, The Theory of Taxation and Public Economics 209-211 (2008).

29 Lawrence Zelenak, “The American Families Plan and the Future of the Mass Income Tax,” Tax Notes Federal, Aug. 23, 2021, p. 1277.

30 See, e.g., Jim Tankersley, “In Push to Tax the Rich, White House Spotlights Billionaires’ Tax Rates,” The New York Times, Sept. 23, 2021. Cf. Richard Rubin and Rachel Louise Ensign, “Is the Income-Tax Rate on the Rich 8%, or 23%? Depends on Whose Math You Use,” The Wall Street Journal, Oct. 10, 2021.

33 Samuel D. Brunson, “‘I’d Gladly Pay You Tuesday for a [Tax Deduction] Today’: Donor-Advised Funds and the Deferral of Charity,” 55 Wake Forest L. Rev. 245, 247 (2020).

34 Zelinsky, supra, note 2, at 405-406.

36 Bankman et al., supra note 21, at 37, 171-173.

38 Emily Glazer, Justin Baer, and Khadeeja Safdar, “Warren Buffett to Quit as Gates Foundation Trustee,” The Wall Street Journal, June 23, 2021; and Haleluya Hadero, “Buffett Resigns From Gates Foundation,” St. Louis Post-Dispatch, June 24, 2021.

39 Nicholas Kulish, “What the Gates Divorce Means for the Bill and Melinda Gates Foundation,” The New York Times, May 4, 2021; and Hadero and Glenn Gamboa, “Philanthropy World on Edge; Gates Divorce Could Shake Up Plans of Pair’s Foundation That Donates $5 Billion in Annual Grants,” Chicago Tribune, May 6, 2021.

40 Zelinsky, supra note 7, at 757-760; Madoff, supra note 7, at 347-349; and Brunson, supra note 33, at 258-272.

41 Zelinsky, supra note 7, at 760. Professor Madoff urges Congress to strengthen these rules. Madoff, supra note 7, at 354-355.

42 If the decedent has a surviving spouse, she could postpone taxation by leaving her estate to her spouse in a manner that qualifies for the estate tax marital deduction. Section 2056. In that case, the proposed limits on the estate tax charitable deduction would take effect on the surviving spouse’s subsequent death when that spouse leaves the couple’s assets to charity.

43 See Zelinsky, supra note 7, at 757-760; Madoff, supra note 7, at 347-349; and Brunson, supra note 33, at 258-272.

44 The functional equivalence of donor-advised funds and private foundations suggests that the income tax deduction limits that apply to donations to private foundations should also apply to contributions to donor-advised funds.

45 Build Back Better Act, supra note 1, at section 138206.


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