Charitable Deduction

Current Law

Currently, a taxpayer's charitable deduction rate is tied to his or her marginal tax rate. For example, a taxpayer earning more than $400,000 annually ($450,000 for households) can take itemized deductions for charitable donations at the 39.6 percent rate. This means that a taxpayer gets a tax benefit of nearly 40 cents for every $1 he or she donates to educational institutions or other charities.

Taxpayers earning more than $250,000 annually ($300,000 for households) are subject to the "Pease limitation," which reduces their itemized deductions, including the charitable deduction, by 3 percent of the difference between their income and $250,000/$300,000. Under this provision, itemized deductions cannot be reduced by more than 80 percent. The threshold amounts are indexed annually for inflation.

Proposed Change

Lawmakers on both sides of the aisle have discussed various proposals for limiting or eliminating the charitable deduction.

In his FY13 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 they donate to educational institutions or other charities.

During the 2012 presidential election campaign, Republican candidate Mitt Romney proposed a hard dollar cap ($17,000 or $25,000) on itemized deductions for high-income taxpayers, though he did not specify whether the charitable deduction would be subject to the cap. If enacted, such a proposal would effectively eliminate the charitable deduction for many taxpayers, since mortgage interest and state and local taxes would account for most, if not all, of deductions taken below the hard dollar cap.

Additionally, the president's National Commission on Fiscal Responsibility and Reforms, also known as the Simpson-Bowles Commission, has proposed replacing the current charitable deduction with a 12 percent nonrefundable tax credit available to all taxpayers.

CASE Position

CASE supports preserving the full value of the charitable deduction.

Impact on Educational Institutions

The administration and supporters of proposals to limit or cap the charitable deduction 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. Coupled with the declines in personal wealth and the proposed increase in marginal tax rates, opponents say, a charitable deduction cap could cause a significant decline in giving to educational institutions.

Status

On Jan. 2, 2013, President Obama signed the American Taxpayer Relief Act of 2012 (H.R. 8) into law. Under the new law, the marginal tax rate for individuals earning more than $400,000 ($450,000 for households) is 39.6 percent. Marginal tax rates for taxpayers earning under $400,000 remain the same. Lawmakers did not cap the charitable deduction in the new law, which means a taxpayer's charitable deduction rate remains equal to his or her marginal tax rate.

While the charitable deduction was not capped, the new law does reinstate the "Pease limitation," a provision that reduces itemized deductions, including the charitable deduction, for high-income taxpayers. Taxpayers must reduce their itemized deductions by 3 percent of the difference between their income and $250,000 ($300,000 for households). Itemized deductions cannot be reduced by more than 80 percent and the thresholds are annually indexed to inflation. Since the limitation is tied to income level and not the amount of deductions, the provision will likely have a minor impact on charitable giving.

                                                                                                                Updated Jan. 15, 2013

Resources

• Key Message Points on Proposals to Cap or Limit the Charitable Deduction
• Dec. 18 Charitable Deduction Briefing Call Audio (log in required)
• What Does the Fiscal Cliff Deal Mean for Nonprofits?, Urban-Brookings Tax Policy Center (Jan. 10, 2013)
• Simple Guide to the American Taxpayer Relief Act of 2012, Campbell & Company (Jan. 10, 2013)
• Charitable Benefits of the American Taxpayer Relief Act of 2012, Crescendo Interactive (Jan. 4, 2013)
• Overview of the Philanthropic Impact of the "American Taxpayer Relief Act of 2012," The Sharpe Group (Jan. 3, 2013)

Letters

• Higher Education Associations Charitable Giving Letter to President Obama, Nov. 21, 2012 (PDF)
• Higher Education Associations Charitable Giving Letter to Congressional Leaders, Nov. 21, 2012 (PDF)
• Charitable Giving Coalition Letter to President Obama, Nov. 14, 2012 (PDF)
• Charitable Giving Coalition Letter to Speaker John Boehner, Nov. 14, 2102 (PDF)

News Coverage

• Obama Defends Push to Cut Tax Deductions for Charitable Gifts, Washington Post, March 26, 2009
• A Deduction from Charity, op-ed against proposal by Martin Feldstein, Washington Post, March 25, 2009
• Giving and Taxes, New York Times editorial in support of proposal, March 19, 2009
• President's Proposal to Cap Itemized Deductions Faces Resistance on Hill, CASE Coverage, March 5, 2009
• White House Rethinks Tax Hikes, Wall Street Journal, March 5, 2009
• Recession, Tax Plans Worry Donors, Nonprofits, Politico, March 5, 2009
• Charities Say Tax Changes Add to Pain, Wall Street Journal, March 2, 2009
• Charitable Deduction Limit Draws Controversy, Chronicle of Philanthropy, March 2, 2009

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.