The Chronicle of Philanthropy
President Obama renewed his proposal to limit the value of charitable deductions for high-income taxpayers in the fiscal 2011 budget plan he presented to Congress, a measure that would increase the cost of giving for many wealthy Americans.
The proposal would limit to 28 percent the tax break couples that earn $250,000 (or individuals who earn $200,000) could get for their itemized deductions, including gifts to charity.
The president proposed a similar limit in last year’s budget as a way to help pay for a health-care overhaul, but it was not endorsed by Congress.
This year he included it in a plan that he said sought to correct years of tax policies “that have disproportionately benefited high-income Americans and corporations” and produced a tax code that is “insufficient to meet national needs.” The White House said the change would raise more than $291-billion from 2011 to 2020.
Combined Impact
Some fund raisers worry the president’s proposal, if enacted, would significantly reduce giving by major donors.
The president has paired the deduction limit with a planned proposal to end the tax cuts for wealthy Americans that were enacted during the Bush administration.
That means the top tax bracket would rise to 39.6 percent next year, up from 35 percent now. Normally the value of itemized deductions is tied to a taxpayer’s marginal tax rate—the bracket that applies to the last dollars earned.
But under Mr. Obama’s proposal, wealthy people would be paying more in taxes while getting less of a tax benefit for gifts to charity.
Matt Dolan, a Washington tax lawyer, said the after-tax cost of making a charitable donation for Americans in the highest tax bracket would be almost 20 percent higher with the 28 percent cap than if they could write off the full 39.6 percent. In other words, a $100 gift would cost them $72 instead of just over $60.
He predicts the proposal will be a hard sell since it would affect economic areas, including housing, “that are in very dire straits.” In addition to charitable contributions, the new limits would apply to deductions for mortgage interest and state and local taxes.
The administration argues the economy will be in better shape by the time it would take effect.
'Wrong Message’
The proposal has already started to spark a furious debate within the nonprofit world, which was divided over last year’s plan.
“A limit on charitable deductions aimed at those who are in a financial position to make the most significant contributions sends the wrong message at the wrong time,” said William C. McGinly, president of the Association for Healthcare Philanthropy, which represents roughly 2,200 hospitals and health-care systems in the United States and Canada.
In last year’s debate, some charity officials, however, defended the plan as a way to bring more equity to the tax code while also helping to pay for changes to the health-care system that would help nonprofit groups and the people they serve.
The administration argues the current system is unfair because people in lower tax brackets get a smaller-percentage break for itemized deductions than wealthier taxpayers.
Getting the plan through Congress is expected to be a challenge.
Rep. Roy Blunt, a Missouri Republican, said he plans to oppose the president’s charitable-deduction proposal, a position he took last year as well.
“Raising taxes on families during a recession is bad policy,” said Mr. Blunt. “Raising taxes on those who want to help others is outrageous.”
Rep. Blunt added: “This tax hike will rob charities and churches of support for their good works in order to feed an ever-expanding government.”