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Wednesday, April 10, 2013

The Budget and the Charitable Deduction

Our chapter on civic culture discusses charitable giving, and our chapter on economic policy looks at tax deductions. The two topics are closely related, since the tax code provides a deduction for charitable contributions. The president's 2014 budget says:
Currently, a millionaire who contributes to charity or deducts a dollar of mortgage interest enjoys a deduction that is more than twice as generous as that for a middle class family. The Budget would limit the tax rate at which high income taxpayers can reduce their tax liability to a maximum of 28 percent, a limitation that would affect only the top three percent of families in 2014.

The Democratic president has failed since 2009 to impose a 28-percent limit on the value of itemized deductions for such expenses as mortgage interest, state and local taxes, and gifts to charities as a way to help tame the federal budget deficit.
A coalition of charities helped head off the president’s most recent attempt when the White House and Congress reached a budget deal on January 2. In fact, that agreement actually increased the value of itemized deductions by raising the top marginal income tax rate to 39.6 percent from 35 percent. Because the charitable deduction is tied to a person’s tax rate, donors in the highest bracket are now able to get a tax savings of 39.6 cents for every dollar donated to charity.
That means a $1,000 contribution would cost a taxpayer $604.
The 28-percent proposal would limit the value of the deduction to $280 on that same gift, increasing the cost of the donation to $720, or by 19.2 percent.
The White House estimates that the new limit would generate $321-billion in additional revenue through 2021, according to the Tax Policy Center.
Obama administration officials have said that the change would affect only high-income taxpayers—singles with incomes in excess of $200,000 and married couples with incomes above $250,000. Taxpayers with incomes below those levels who do not itemize deductions would not be affected—“the vast majority of donors,” Jacob Lew, the new Treasury secretary, said.
But nonprofit advocates say the proposal could reduce donations by as much as $9-billion annually.