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The Charitable Giving Incentive

Federal tax law currently encourages individuals to give to charitable organizations whose missions they support by providing an itemized deduction. Policymakers in Washington are focusing on how to reduce the federal budget deficit through spending cuts, entitlement reforms, and changes to the tax code. The President, Senators, Representatives, bi-partisan commissions, and think tanks have all put forward plans to address these issues, and many propose changing the charitable giving incentive in one way or another. No one knows the true impact that any of these proposals will have on the ability of charitable nonprofits to raise the resources needed to provide the programs and services that fulfill their missions. It is imperative that Congress make no changes to the charitable deduction that threatens the ability of nonprofit organizations to serve those most in need and to continue to strengthen our communities.

Why it Matters to Nonprofits

Capping all itemized deductions, including charitable giving, would effectively take away incentives for donations to churches and synagogues, domestic violence shelters, early childhood programs, food banks, school alumni groups, and all other charitable nonprofits, and would further reduce the ability of charitable organizations to meet the increasing need for services in their communities.

Nonprofit organizations throughout the United States are dedicated to the public good; their work improves lives, strengthens communities and the economy, and lightens the burdens of government, taxpayers, and society as a whole. Maintaining the value of the charitable deduction is essential to the ongoing work of nonprofit organizations in delivering essential services, enhancing quality of life, and uplifting the spirit of faith, innovation, and inspiration in local communities across America.

What Nonprofits Can Do

Changes to the charitable giving incentive remain a threat as part of comprehensive tax reform. Help protect the charitable giving incentive that supports the work of nonprofits in our communities now and in the future by sharing your story here and contacting your Senators and Representatives to tell them how the giving incentive translates into impact in your community.

Status

On June 27, 2013, Senate Finance Committee Chairman Max Baucus (D-MT) and Ranking Member Orrin Hatch (R-UT) sent a letter informing Senators that the Committee will start consideration of a tax reform package with a "blank slate," meaning that it contains no deductions or credits, so Senators will have to fight to get their favored tax provisions re-inserted into the bill that is being drafted. The Committee leaders stressed that the legislation they are drafting on a bi-partisan basis will restore only those deductions, exclusions, credits, and other tax expenditures that (1) help grow the economy, (2) make tax laws fairer, and (3) effectively promote other policy objectives. They've asked Senators to submit recommendations for provisions that meet these standards by July 26. They've asked Senators to submit recommendations for provisions that meet these standards by July 26. Senators are likely to use as a guide a Committee staff report on tax-exempt organizations and charitable giving that includes a list of options including repealing the charitable deduction outright, converting the deduction to a tax credit, imposing a minimum for deductible donations (floor), and capping the value of the deduction at a certain percentage or dollar amount (ceiling).

The President signed into law on January 2, 2013 the "American Taxpayer Relief Act of 2012," an agreement reached by leaders in the House and the Senate that averts the fiscal cliff while maintaining incentives for charitable giving for most Americans. The new law stands to impact some donations from higher income earners through the reinstatement of the Clinton-era Pease Limitation. The Pease Limitation reduces itemized deductions, including the charitable deduction, by three percent for adjusted gross incomes over $250,000 ($300,000 for couples), with a maximum reduction in itemized deductions of 80 percent.

Proposals to Alter the Charitable Deduction

  • President Obama’s 28% Limit: President Obama has proposed limiting the value of charitable and itemized deductions for upper-income taxpayers, capping the deduction at 28 percent, regardless of whether the individuals are in the 33 percent or 35 percent tax brackets. This proposal has been included in the President’s FY 2014 budget and his other four annual budget proposals, the American Jobs Act, and his deficit reduction plan submitted to the supercommittee.
  • 12% Tax Credit: The National Commission on Fiscal Responsibility and Reform (Bowles-Simpson Commission) empaneled by President Obama recommended significant changes to the federal tax code, including converting the current charitable itemized deduction into a 12-percent, non-refundable tax credit available to all taxpayers, but only for donations above two percent of Adjusted Gross Income (AGI).
  • 15% Refundable Credit: the Bipartisan Policy Center's Debt Reduction Task Force issued its own set of recommendations for deficit reduction that included cutting individual income tax rates and reducing the number of tax brackets, and eliminating the charitable deduction and replacing it with a 15 percent refundable tax credit payable to nonprofits.
  • The Congressional Budget Office issued a report in May 2011 projecting the potential impact of 11 proposals to alter the charitable giving incentive in the federal tax code. The report found that both charitable giving and federal tax receipts would increase if Congress either (a) applied the tax deduction to all taxpayers (itemizers and non-itemizers alike) but imposed a minimum floor on contributions of $500 for individuals and $1000 for couples, or (b) converted the deduction to a 25 percent tax credit for everyone who gave more than the $500/$1000 floor.
  • Economist Martin Feldstein presented a proposal to cap the value of all itemized deductions, including charitable giving, mortgage interest, and state and local sales taxes, at two percent of adjusted gross income (AGI). Feldstein has since called for exempting the charitable giving incentive from his proposal, explaining in a Washington Post article, “The full deduction for charitable contributions should be retained, because the money that taxpayers give to charity benefits those organizations rather than the individual taxpayer.” No congressional proposal containing this version of the Feldstein plan has been offered.
  • The Washington Post has proposed capping itemized deductions at $25,000 for individuals and $50,000 for couples per year to raise $749 billion in new tax revenue over ten years, based on data from the Tax Policy Center. The approach, which is similar to one raised by Gov. Mitt Romney during the 2012 presidential campaign, would apply to all itemized deductions, including charitable donations, reverse mortgage interest, and state and local taxes. The Post recognized that “There would be pushback from charities that depend on donations from the wealthy, and from high-tax states that rely on state and local tax deductions.” It concludes, “But assuming legitimate issues can be addressed, capping deductions could be part of a red-blue compromise.”
  • The New York Times reports that Third Way, a Democratic centrist group, made Mitt Romney's 2012 campaign proposal to cap itemized deductions the centerpiece of their package of proposed tax expenditure changes that could produce nearly $1.3 trillion in revenue over 10 years. Third Way’s proposal would limit all tax deductions to $35,000, with the exception of the charitable giving incentive.

The Economic Impact on Nonprofits

Estimates on the economic impact that the President's original proposal and other recommendations on changing the giving incentive vary widely.

  • CBO's Proposals: The CBO's 11 policy proposals for how to restructure the charitable giving incentive and the economic impact that each would have are listed in the chart below:

CGI graph

  • President's Proposal: Once a part of the jobs bills, The President’s proposal to decrease the cap on the charitable giving incentive from 35 percent to 28 percent has met with diverse predictions about the effect it will have on the contributions nonprofits receive, ranging from a minor impact (a decline of 1.9 percent) to a moderate impact (a decline of 4.6 percent) to a large impact (a decline of $9 billion.)

Additional Resources