Potential changes to incentives for charitable giving in the tax code have been an ongoing part of deficit reduction and tax reform discussions, including a proposal offered by President Obama that would cap the charitable deduction at 28 percent for high-income taxpayers, as well as proposals to establish a hard-dollar aggregate cap on all itemized deductions.
The charitable deduction is an important and effective incentive for giving, strengthening the nonprofit and philanthropic sector's capacity to meet the needs of our communities.
Senate Finance Committee outlines options for deduction
On June 13, the Senate Finance Committee released a tax reform options paper focused on tax exempt organizations and charitable giving. The 19-page report, which is not endorsed by any particular member or leader of the committee, reviews current law and compiles legislative options for the charitable deduction and other items related to the tax exempt sector. Potential changes to the deduction include a percentage cap, an aggregate dollar cap, a floor, conversion to a credit, and an extension in the accrual deadline for annual tax filings, among others.
President's FY 2014 budget proposes 28 percent cap on itemized deduction
For the fifth consecutive year, President Obama has proposed capping itemized deductions, including the charitable deduction, 28 percent on income above $200,000 ($250,000 for joint filers).
The budget also proposes the creation of the Buffett Rule, which would impose a minimum 30 percent effective tax rate on income above $1 million annually. The charitable deduction would be the only tax deduction available to taxpayers subject to the Buffett Rule.
Ways and Means creates tax reform working groups
Ways and Means Committee Chairman Dave Camp (R-MI) and ranking member Sander Levin (D-MI) have created 11 tax reform working groups, including one dedicated to charitable and exempt organizations. The charitable and exempt working group, led by Rep. Dave Reichert (R-WA) and Rep. John Lewis (D-GA), is responsible for compiling feedback from stakeholders, academics and think tanks, practitioners, the general public, and colleagues in the House of Representatives. Read Independent Sector's submitted comments here.
This feedback was incorporated into a broader report that the Joint Committee on Taxation (JCT) submitted to the full committee on May 6. The report begins by summarizing tax law for the charitable and exempt organizations and later outlines feedback to the Committee on many issues of importance to the sector, including the charitable deduction, unrelated business income tax (UBIT), tax-exempt status, and the IRA charitable rollover.
Ways and Means holds hearing on charitable giving
The House Ways and Means Committee held a hearing Thursday, February 14 to examine the itemized deduction for charitable giving as part of its work on comprehensive tax reform. Forty-two witnesses, including Independent Sector President and CEO Diana Aviv, on 7 panels were invited to share testimony before the full Committee.
Committee Chairman Dave Camp (R-MI) said in his opening
statement that he convened the hearing in order to get direct input from the
charitable community before the panel begins considering tax reform options
that could fundamentally change the current charitable deduction or the way
that charitable giving incentives are treated in the tax code more broadly.
No aggregate or percentage cap included in final fiscal cliff deal
As a result of the strong advocacy efforts of the charitable sector, a percentage or aggregate cap on itemized deductions, including the charitable deduction, was not included in the final fiscal cliff legislation passed by Congress.
Among these efforts was a letter sent to Congress and the President on the charitable deduction. On December 10, 2012, this letter -- with 937 nonprofit organizations signed-on
-- was delivered to the White House and to all 535 members of Congress telling
them to not push charities over the fiscal cliff. The letter also ran as
a two-page ad in POLITICO on the same day: See the ad | Download the letter.
Return of Pease
However, the fiscal cliff agreement does reinstate the Pease provision, which will place limits on itemized deductions, including the charitable deduction, for families earning over $300,000 per year ($200,000 for individuals).
The Pease limitation on itemized deductions, first instituted by the Omnibus Budget Reconciliation Act of 1990 and named after former Congressman Donald Pease (D-OH), reduces most itemized deductions by 3 percent of the amount by which AGI exceeds a specified threshold ($300,000/$250,000), up to a maximum reduction of 80 percent of itemized deductions.
As an income-based limitation, the Pease provision is
intended to serve as a surtax on income above a certain threshold, rather than
as a penalty on, or disincentive for, itemized deductions.
Independent Sector urges Congress to reject proposals to limit the value of itemized deductions for charitable donations. As nonprofit organizations struggle to meet increased demand for services and raise the necessary funds to meet those needs, Congress should seek to encourage all individuals, regardless of income and wealth, to give more to charitable organizations.
IS Guiding Principles for Public Policy on Charitable Giving
Independent Sector’s Board of Directors has adopted Guiding Principles for Public Policy on Charitable Giving. The principles focus on the role of tax policy in encouraging charitable giving, the importance of sustaining the diversity and independence of the sector, and the sector’s commitment to honor the public trust through transparency and accountability. These principles will be used to guide the development and assessment of legislative proposals to ensure that America’s strong tradition of charitable giving is sustained and strengthened.
In 2011, Independent Sector signed onto a nonprofit coalition letter in opposition to the president's proposal to cap itemized charitable deductions at 28 percent for high-income taxpayers. During the lame duck session of 2012, IS and over 937 other organizations also sent a letter to Congress and the President, urging them to protect the charitable deduction in so-called fiscal cliff negotiations (see above).
President's FY 2014 Budget
President Obama’s FY 2014 budget outline includes proposals for tax changes for high-income earners, including a provision that would cap at 28 percent the value of itemized tax deductions for individuals earning more than $200,000 ($250,000 for families). This is the fifth consecutive time the Administration has proposed the cap in its budget proposal.
Aggregate Cap on Itemized Deductions
In a 2012 news interview, Republican presidential candidate Mitt Romney suggested that a cumulative cap on itemized deductions might be one way to pay to lower tax rates. "You could say everybody's going to get up to a $17,000 deduction; and you could use your charitable deduction, your home mortgage deduction, or others -- your healthcare deduction -- and you can fill that bucket, if you will, that $17,000 bucket that way. Higher-income people might have a lower number," Romney said. When pressed for further details, the Romney campaign responded that “there are a range of policy options” under consideration and “Gov. Romney referenced one illustrative example.” While it is unclear whether the $17,000 figure would apply to individual or joint filers, a Romney aide did say the cap would likely be in addition to a personal exemption that could be adjusted if necessary to prevent a tax increase on middle class families.
The effect of such a cap on the charitable deduction could be devastating, as research suggests that many taxpayers would exceed the $17,000 cap before ever claiming a charitable deduction. According to analysis by the National Association of Home Builders, the average married, joint-filing taxpayer who itemized in 2009 claimed $20,464 in itemized deductions, $17,329 of which was consumed by deductions for home mortgage interest ($10,365), state and local income taxes ($3,667), and real estate taxes ($3,287).
President Obama's Deficit Reduction Recommendations
President Obama has submitted formal deficit reduction recommendations to the Joint Select Committee on Deficit Reduction. The "balanced" proposal of tax increases, spending cuts, and mandatory program changes would reduce the deficit by $3.5 trillion over 10 years and includes a 28 percent cap on itemized deductions on high-income earners.
Learn more about recent studies and reports on the charitable deduction.