Karen Smith Hupp—Senior Executive Director of Community Relations
College of Southern Maryland—La Plata, Md.
United States
Public Policy
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Charitable Deduction

Current Law

Currently, taxpayers making more than $200,000 ($250,000 for married couples) can take itemized deductions for charitable donations at the 33 percent or 35 percent rate depending on their tax bracket. This means that a taxpayer gets a tax benefit of 33 or 35 cents for every $1 he or she donates to educational institutions or other charities.

Proposed Change

In his FY12 budget plan, President Obama proposes to cap the level of itemized deductions, including the charitable deduction at the 28 percent rate. If enacted, taxpayers in the 33 or 35 percent tax bracket would only get a tax benefit of 28 cents for every $1 he or she donates to educational institutions or other charities.

According to the president's proposed budget, revenue generated from the cap would be used to cover the costs of preventing the Alternative Minimum Tax from covering middle-class Americans for three years. Other itemized deductions, including the mortgage interest and state and local tax deductions, would also be capped at 28 percent.

Additionally, the president's National Commission on Fiscal Responsibility and Reforms has proposed replacing the current charitable deduction with a 12 percent non-refundable tax credit available to all taxpayers.

CASE Position

CASE opposes efforts to cap or reduce the value of itemized deductions and urges Congress to protect the value of the charitable deduction.

Impact on Educational Institutions

The administration and supporters of the proposal argue that the effect on donations to educational institutions and charities will be minimal. They believe that donors will continue to give to charities, particularly since studies show that donors' motivation to give for a cause outweighs tax incentives for giving.

Opponents of the proposal argue that it provides a disincentive for high-income taxpayers to give to charitable organizations, including educational institutions. The proposal would devalue the gifts of the very donors who are able to make large gifts during these challenging economic times. Coupled with the declines in personal wealth and the proposed increase in marginal tax rates, opponents say the itemized deduction cap could cause a significant decline in giving to educational institutions.

Status

In August 2011, Congress passed and President Obama signed legislation that calls for creation of a bipartisan super committee of lawmakers to identify specific ways to reduce the deficit by $1.5 trillion. Though not specifically mentioned in the legislation, lawmakers could look at reducing the value of the charitable deduction to raise the revenue needed to reduce the deficit

                                                                                                                Updated Aug. 9, 2011

Data
  • Center on Budget and Policy Priorities finds that the president's proposal would only reduce charitable contributions by 1.3 percent.
  • Center on Philanthropy at Indiana University finds that the president's proposal would have a small negative effect on overall charitable giving. However, the center says the proposal, combined with the president's proposed increases in marginal tax rates, could decrease giving among high-income households by 4.8 percent.
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