Charitable Deduction

20 December 2011

Subject

Proposed modification of the charitable deduction

Current Status

The President’s FY 2012 budget request includes a proposal to cap itemized deductions, including those for charitable donations, at 28% for families earning over $250,000 a year.  This marks the third consecutive year that the president’s budget includes a provision to cap deductions.  The  charitable deduction was an issue of discussion in the deficit reduction negotiations of the Joint Select Committee on Deficit Reduction (the "Super committee"), however, that committee failed to reach an agreement on a deficit reduction plan.

Background

When the economy stagnates, nonprofits and their services are needed the most.   Nonprofits bridge the gap by serving those in need and our communities when budgetary constraints hinder state and federal governments from providing similar services.  These charity-provided services are critical, and reducing charitable giving would not just harm the nonprofit sector, but it would hurt the lowest-income people who rely heavily upon these services.  

Nonprofits create jobs and leverage economic gains.  Any proposed changes in the charitable deduction law should not only reduce deficit spending, but should benefit nonprofit services by providing a greater incentive to give.  To truly jumpstart the economy, the federal government should remove barriers that limit charitable giving, not construct more of them.  While Americans do not make charitable gifts only for tax reasons, tax incentives make more--and larger--gifts possible.  History and the actions of the federal government indicate that tax incentives do, in fact, affect charitable giving.  During times of crisis, such as the natural disasters like Hurricane Katrina, the 2008 Midwest flooding and the 2010 Haiti earthquake, Congress regularly passes charitable giving incentives to make it easier for Americans to give donations and support to the nonprofits serving individuals, families and communities in need. 

As nonprofits struggle to meet increased demands for their services and raise additional funds, we need to encourage all individuals, regardless of income and wealth, to give more to nonprofit organizations.  Limiting the value of the charitable deduction does the exact opposite and would fundamentally change a tax structure that has contributed to a cherished tradition of charitable giving that is unmatched in the world.

Discussion

Although Congress has soundly rejected proposals similar to the President’s in the past, it is important to note that we’re operating in a new political environment with a new Congress focused on deficit reduction and tax reform – and proposals like the charitable deduction cap may find their way into broader discussions on these issues.  Still, as long as the Charitable Deduction is tied to other tax deductions, in particular  the home-mortgage deduction and the state income tax deduction, changes to--and certainly the elimination of--the Charitable Deduction seems unlikely.

The Congressional Budget Office (CBO), a non-partisan research agency, investigated eleven proposals for changing the charitable deduction law.  The CBO reviewed the impact each proposal would have on charitable giving as well as government revenues.  Only two of the scenarios would likely increase giving and government revenues – providing either a tax credit of a deduction to all income tax filers who contribute $500 or more to charitable organizations annually.  These scenarios are not just win-win scenarios (helping nonprofit incomes and reducing the federal deficit), they prove to be win-win-win scenarios, because they have a positive income impact on lower-income families.

Conclusion

Some nonprofits want no change to the charitable deduction law.  With all the discussion and proposals, and the mood for tax reform in Washington, DC, however, change seems almost inevitable.  If a change is made to the charitable deduction law, we ought to look at one that will benefit the most people while increasing government revenue.

Changes to the charitable deduction law that benefit the most people would provide an incentive for more people to contribute, increasing contributions to nonprofits, which in turn would provide nonprofit organizations with greater resources and add value to the services they provide.   Changes must also increase revenues to the government to help reduce the deficit.  Alliance FOR Nonprofits Washington supports those changes, not proposals that would decrease incentives to contribute.

Options for Changing the Tax Treatment of Charitable Giving.tif