Obama Budget Proposes Limiting Charitable Deduction

President Obama's budget contains a proposal to cap the rate of the charitable deduction to 28 percent for individuals making over $200,000 and joint filers making over $250,000.  There is widespread concern throughout the nonprofit community that, if enacted, this proposal could severely limit charitable donations.

The proposal would cut by as much as 20 percent the amount by which higher-income taxpayers could reduce their taxes through charitable donations.  Under current law, taxpayers in the 33 or 35 percent bracket use that rate to claim the charitable deduction.  The White House estimates that the proposed limitation would raise $318 billion over 10 years, to be used to pay for health care affordability and availability initiatives.

Charitable giving experts seem to disagree over the extent of the proposal's effect on giving by higher income individuals and families.  Many taxpayers who would normally be in the 33 or 35 percent bracket already have many of their deductions limited to 28 percent through the Alternative Minimum Tax (AMT).  However, since the AMT generally doesn't reduce the tax benefits of charitable deductions, there is less hard data on how much a limitation on charitable gifts deductibility would reduce actual giving.

There is particular concern that this proposal could have a severe impact on larger nonprofits - like colleges and universities - that don't have a broad base of donors.  While the last thing our institutions need in the current economic climate is a restriction on donations, the plan is an effort by the White House to "rebalance the tax code so that the wealthiest pay more."

During a March 4 hearing, Senate Finance Chairman Max Baucus (D-Mont.) and Vice Chairman Charles Grassley (R-Iowa) expressed strong reservations about this proposal to Treasury Secretary Tim Geithner.  While Geithner downplayed any significant harm to the nonprofit sector as a result of the limit, he did say that there may be "wiggle room" to amend the tax proposals. 

It's noteworthy that the senators who will be writing the tax portion of budget reconciliation have stated their opposition to reducing the charitable deduction. Recent reports indicate the administration may be backing off from its insistence on this provision.  However, revenue sources are scarce, and the White House will have to find the money to offset the health care initiatives somewhere.

For more information, please contact:
Karin Johns