Thursday, November 8, 2012
With the 2012 election (mostly) behind us, and the fiscal cliff and growing federal government debt in front of us, it is an appropriate time to consider possible changes to the charitable contribution deduction.
Cap on Value of Itemized Deductions: As we have previously noted, the Obama administration has repeatedly called for a cap on itemized deductions, including the charitable contributiond deduction, by limiting the benefit from such deductions to 28%. This would mean that taxpayers with a higher marginal rate than 28% would not avoid completely the otherwise owed federal income tax on the income offset by the deduction. Not surprisingly, leading charitable organizations, including Independent Sector, have come out in opposition to this proposal. For an analysis of this proposal, see the 2010 Congressional Research Service report on it.
Replace Deduction with a Non-Refundable Tax Credit: The National Commission on Fiscal Responsiblity and Reform, more commonly known as the Simpson-Bowles Commission, proposed replacing the charitable contribution deduction with a 12 percent non-refundable tax credit for charitable contributions that exceed 2 percent of adjusted gross income in the Commission's final report (page 31). With Erskine Bowles being mentioned as a possible candidate for Secretary of the Treeasury if and when current Secretary Tim Geithner steps down, the Commission's recommendations may very well still be in play despite the lack of initial enthusiam for them from either the Obama Administration or Congress.
Other Revenue-Saving Modifications: As the agenda for the recent NYU National Center on Philanthropy and the Law Conference illustrates, there are numerous, less dramatic ways that the charitable contribution deduction could be modified, many of which could result in significant revenue savings for the federal government. The most recent Joint Committee on Taxation tax expenditures report states that cost of the deduction over the 2011 thru 2015 fiscal years is $242.6 billion (see pages 40 and 42), so even a relatively small change could potentially generate a not insubstantial amount of additional federal income tax. For additional resources regarding possible changes, see the Urban Institute's Tax Policy and Charities website, and especially the report titled Evaluating the Charitable Deduction and Proposed Reforms by Roger Colinvaux, Brian Galle, and C. Eugene Steuerle.