McClelland, Theory and Evidence for a Tax-Day Deduction

Robert McClelland (Urban Institute) has posted Theory and Evidence for a Tax-Day Deduction. Here are the key takeaways:

• Extending the charitable deduction deadline to tax filing day would allow taxpayers to consider the benefits of additional donation while calculating their taxes. Currently, a donation made in January 2025 can be deducted only when a taxpayer files their tax return in the spring of 2026. That means it would take more than a year for a taxpayer to see the effects of their charitable giving. By comparison, a tax-day deduction would let people who donate in April 2026 see a reduction in their taxes owed almost immediately, helping them become aware of their charitable deductions. Tax preparers or tax software could also help facilitate this by showing taxpayers how their taxes owed would change with additional donation.
• A tax-day deduction is tax-efficient for the government because it promotes charitable contributions without increasing the subsidy. Research on tax-day deductions implemented in the wake of a natural disaster showed that the policy increased charitable giving.

The benefits of a tax-day deduction outweigh the drawbacks. The 2017 Tax Cuts and Jobs Act substantially increased the standard deduction, reducing the share of taxpayers who itemize mainly to those with higher incomes. And the recently passed One Big Beautiful Bill Act has complicated the tax treatment of contributions by creating a new incentive with a ceiling and placing a floor under the old incentive. A tax-day deduction could help taxpayers understand which, if either, applies to them.