ACR NEWSLETTER

Key Development: Proposes 28 percent limit on charitable deductions for the wealthiest Americans.
Potential Impact: Maintains the status quo on deductions rather than providing a special rule for charities.
Next Steps: Obama’s budget faces tough scrutiny as Congress forges a compromise plan for FY 2013.

President’s Obama’s fiscal year 2013 budget proposed a 28 percent limitation on itemized deductions for the wealthiest Americans—including the charitable deduction.

Charities had hoped the budget, released Feb. 13, would continue to single out the charitable deduction as the only deduction not to be capped at 28 percent (17 DTR G-4, 1/27/12).

Instead, the budget would reduce the value of itemized deductions and other tax preferences to 28 percent for families with incomes of more than $250,000, and individuals making more than $200,000.

It maintained the cap on charitable deductions that the current administration has suggested in two other budget proposals, and twice as a revenue raiser for other priorities.

“For now it’s [the] same old, same old,” Sandra Swirski, executive director of the Alliance for Charitable Reform, told Bloomberg BNA.

However, she said the budget holds out hope of favorable treatment for charities in the future, through the enactment of tax reform.

“It’s sort of a short term/medium term solution,” Swirski said. “In the short term it says we should limit itemized deductions to 28 percent, but in the longer term, when we think about tax reform and throwing everything up in the air, it says we need to keep in mind the Buffett Rule, which preserves the charitable deduction.”

Buffett Rule Offers Hope
Obama’s goal in limiting the deduction to 28 percent is clear—it would reduce the deficit by $584 billion over 10 years.

But the budget also said tax reform should be accomplished through the Buffett rule. The Buffett rule would require that no household with income of more than $1 million pay less than 30 percent of its income in taxes.

In observing the Buffett rule, Obama said the administration would work to ensure that the rule is implemented in a way that is equitable, “including not disadvantaging individuals who make large charitable contributions.”

Charitable sector representatives said it is not entirely clear yet how the administration means for the Buffett rule to play into the calculation of the charitable deduction.

“We don’t know what they mean by the Buffett rule yet,” Diana Aviv, president and chief executive officer of Independent Sector, said Feb. 13.

“It looks like the level at which anyone who earns more than $200,000 will be able to take a charitable deduction is 28 percent—including millionaires,” Aviv said.

However if the charitable deduction is seen as a way to change the base line of income on which a donor would pay 30 percent in income tax, it would incentivize giving, Aviv said. It could be that the administration is proposing that charitable donations be deducted from total income to reduce gross income, she said.

Less Income, Less Charity
The Alliance for Charitable Reform said the Buffett rule provision does signal an appreciation for the charitable giving incentive, but it remains concerned about the broader implications on an individual’s discretionary income. “Less discretionary income would likely equal less charity,” it said.

The Tax Policy Center, in October 2011, estimated that capping the charitable deduction at 28 percent would reduce giving by up to $5.6 billion each year (204 DTR G-3, 10/21/11).

That is more than the annual operating budgets of Red Cross, Goodwill, the YMCA, Habitat for Humanity, the Boys and Girls Clubs, Catholic Charities, and the American Cancer Society combined, ACR said.