Experts doubt the new limits on deductions will have much impact on giving, but some major nonprofit organizations fear they're a sign that the charitable deduction is no longer sacrosanct on Capitol Hill, just as Congress is promising a broader effort later this year to overhaul the tax code.
The limits on deductions are part of the new tax law Congress passed on New Year's Day. They reduce the value of all itemized deductions for individuals making more than $250,000 and married couples making more than $300,000. Advocates are concerned the limits will reduce the tax incentive for people to make donations to charities and nonprofits such as religious institutions, colleges and groups that help the poor.
"The charitable deduction incentive is different than any other deduction or credit in the tax code," said Sandra Swirski, executive director of the Alliance for Charitable Reform, which lobbies on behalf of donors and private foundations. That's because the deduction encourages people to give away income, while other deductions and credits encourage people to buy things they can then write off, she noted.
Charitable giving in the U.S. increased in 2010 and 2011, according to the latest data. But it has yet to fully return to pre-recession levels, according to data from the Giving USA Foundation and the Indiana University School of Philanthropy.
Charitable giving by individuals, foundations and corporations topped $298 billion in 2011. In 2007, it was $337 billion, in inflation-adjusted dollars.
The new tax provision reduces the amount of itemized deductions a taxpayer can claim by 3 cents for every dollar of income above the threshold. For example, if a married couple has an adjusted gross income of $400,000, that's $100,000 above the threshold, so the itemized deductions would be reduced by $3,000.
Itemized deductions cannot be reduced by more than 80 percent, under the provision.
In this example, if the couple had a total of $60,000 in itemized deductions, they could claim only $57,000. If they were in the 33 percent income tax bracket, the provision would increase their taxes by $990.
The provision is a revival of the "Pease" limitation, first enacted in 1990 but phased out in 2010 as part of the massive package of Bush-era tax cuts. It is named after a deceased congressman, Rep. Donald Pease, D-Ohio, who wrote the measure.
Experts say there is no evidence that the limitation reduced charitable giving in the past, and no reason to think it will have much of an impact going forward. Charitable giving steadily increased in the 1990s, when the economy flourished.
One analysis estimates that, on balance, charitable giving will increase slightly because of the new tax law. That's because high earners facing the increased tax rates have more incentive to seek deductions, and those deductions become more valuable.
The new law increases the top income tax rate from 35 percent to 39.6 percent on taxable income above $400,000 for individuals and $450,000 for married couples. It also increases the top tax rate on long-term capital gains for taxpayers with incomes above those thresholds.
Both provisions increase incentives for people to make charitable donations, according to the analysis of the law by the Urban Institute Center on Nonprofits and Philanthropy.
For example, if a married couple has a top income tax rate of 35 percent, a $1 deduction will lower their tax bill by 35 cents. If that same couple has a top tax rate of 39.6 percent, a $1 deduction will lower their tax bill by nearly 40 cents, making the deduction more valuable.
Similarly, the higher tax rate on capital gains increases the incentive to donate securities to charity as a way to avoid those taxes, said Eugene Steuerle, a fellow at the Urban Institute who worked on the analysis.
The Pease limitation, meanwhile, should have a negligible impact on charitable giving because it is based on income, not on the amount of deductions, Steuerle said.
Nevertheless, nonprofits and charities are wary of any provision that could limit the charitable deduction.
"We just know that this change is definitely not going to be helpful," said Gloria Johnson-Cusack, executive director of Leadership 18, an alliance of CEOs of charities, non-profits, and faith-based organizations. "We don't think now is the time to be experimenting with a policy that has the potential" to reduce the incentive to donate.
Charitable organizations fear that even more tax changes could be coming as momentum builds in Congress to overhaul the tax code, to make it simpler and more transparent. So far, lawmakers have been wary of publicly targeting any tax break for elimination, to avoid generating opposition before the process gets started.
Still, interests groups of every stripe already are lobbying Congress to protect cherished tax breaks.
Leadership 18 is part of the Charitable Giving Coalition, a broad group of nonprofit organizations dedicated to preserving tax incentives for charitable giving.
"We are trying figure out the best way to address any kind of changes that they may be talking about that would act as a disincentive," Johnson-Cusack said. "We're real worried about it."
Taxes can play a role in how much people donate to charity, but other factors play a larger role, said Patrick Rooney, associate dean of the Indiana University School of Philanthropy.
"When you ask why people why they are donating, taxes are fairly far down on the list," Rooney said. "The key motivations are really to do things like feed the hungry and house the homeless and to support one's religious organization or to improve the quality of one's alma mater."
"The single biggest factor that would change giving is an improvement in the overall economy," Rooney said.
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