An End to Charitable Deductions?
Proposal to Limit the Charitable Deduction
Tax reform is a hot topic in Washington today with much speculation over the last few months about the government’s plans. One of the most controversial proposals calls for greatly limiting the use of the deduction for charitable contributions, a popular part of the tax code that just this year celebrated its 100th birthday. While the ultimate consequences of such a change are unknown, polls indicate that the majority of voters support the charitable deduction, and around half of donors would reduce their charitable contributions if the tax deduction were eliminated. Among philanthropic beneficiaries, this potentially drastic reduction in giving is an obvious cause for concern.
The Effects on Donors & Non-Profits
Last month, WealthManagement.com came out with two articles highlighting the proposed changes and the effects they could have on non-profits across the country. Among the proposed changes is an increase to the standard deduction which would decrease the number of Americans itemizing deductions. On its face, this may sound great for American citizens, but its effect on non-profit organizations (and those that depend on them) is not so rosy.
It’s estimated that a $24,000 standard deduction for joint filers would reduce the percentage of American taxpayers who itemize and take the charitable deduction from 25 percent (one out of four taxpayers) to 5 percent (one out of 20). This could cost the nonprofit sector billions in lost revenue.
While raising the standard deduction may simplify the tax season for millions of Americans, it will eliminate the use of the charitable deduction for so many more. Additionally, for those individuals who continue to itemize their deductions, the cost of giving may increase with proposed lower income tax rates. For example, for a donor in the 40% marginal tax bracket today, the after-tax cost of giving a dollar is actually only 60 cents (i.e., $1.00 – $0.40 in charitable deductions). However, if the donor’s marginal tax bracket is reduced, the cost of giving will, in turn, increase.
An alternative that has been discussed is to make the charitable deduction available to all Americans, whether they take the standard deduction or itemize. This is based on the view that income that has been donated should not be taxable because the donor never received the income. The hope among non-profits is that making this charitable deduction available to all Americans would offset the donations lost through the proposed tax changes.
These tax reform discussions are still in the preliminary phase, meaning that anything or nothing could happen. Rest assured that the team at KPP is watching and will keep you updated as things unfold.
You can read the full articles here:
