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New Obama Plan Would Reduce Charitable Deductions for Wealthy

(March 2, 2009) President Obama proposed limiting the value of the tax break for itemized deductions, including donations to charity, to 28 percent for families making more than $250,000.

By limiting the size of charitable tax breaks for the wealthy, this measure would reduce by as much as 20 percent the amount wealthy taxpayers could get in tax breaks, reports The Chronicle of Philanthropy. The measure could have big consequences for nonprofit organizations.

However, two AFP members and planned giving experts note that there are strong reasons why the negative effects of this law would be moderate rather than severe.

People Give Because They Care

“Before we begin writing the epitaph for major gifts from generous donors, let’s keep their motivation in mind,” says Sandy Macnab, FAHP, CFRE, president of Alexander Macnab & Co, a Chicago-based fundraising consulting firm. “People do not make charitable gifts because it makes them eligible for a tax deduction. Some give because they want to give back, some to search for a cure, some to support those in need and all because they want to help—personally and privately.”

“While some donors may change the timing or amount of their gift due to tax incentives, they give in the first place because they care,” he adds.

“I think there is less cause for concern here than initially appears,” agrees Richard Barrett, president of Barrett Planned Giving Inc. in Washington, D.C. “People give from the heart—the tax deduction is just icing on the cake.”

Many Wealthy Not Affected

Further, Macnab and Barrett both point out that many wealthy donors that would otherwise have a 33 percent, or even 35 percent deduction, are already subject to the Alternative Minimum Tax which eliminates many deduction options and taxes them at 28 percent. That means they would see no impact with a cap at 28 percent as Obama proposes.

However there do remain wealthy donors who are not subject to the AMT and are taxed at 33 or 35 percent of their adjusted gross income.  An example often given, Macnab says, is that these taxpayers who make a $100,000 gift would save less in taxes, in this example, $7,000 less, than the $35,000 they can now save if Obama’s proposed measure becomes law.

President Obama says the proposal on itemized deductions—which would also apply to claims such as mortgage interest—would raise $318-billion over 10 years, the Chronicle reports. That money would help pay for a 10-year $630-billion reserve fund designed to help make healthcare more affordable and available.

The Effect

Will generous donors who are able to make a large gift now give less?

“That didn’t happen in the wake of the Tax Reform Act of 1969 when the cap on donating appreciated assets dropped from 50 percent of adjusted gross income to 30 percent,” says Macnab, citing information reported by the Charitable Giving Tax Service of R&R Newkirk. “There was fear then that gifts of appreciated assets would diminish or disappear. They didn’t.”

“However, as all charitable organizations struggle to maintain levels of support that will make it possible to serve growing needs in the current economy, it seems inappropriate and short-sighted to do anything that would be a disincentive to encouraging the most generous gifts possible,” he says and adds, “saving taxes helps increase the size of the gift.”

AFP Response

While supportive of the president’s intentions to raise money for healthcare and other projects, AFP President and CEO President V. Maehara, CFRE, CAE, strongly disagreed with the provision. “Not only do charities represent a significant portion of the American workforce, but in the current economic environment they are being asked to provide more services and programs to people in need,” Maehara said. “Limiting the deduction is a self-defeating policy that in the long run will hurt more than it will help.”

Maehara indicated that AFP would begin an aggressive education campaign to members of Congress and the White House about the importance of the tax deduction and the potential impact it would have.

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