Most taxpayers would not feel change in charity deduction
WASHINGTON — Most Americans who file income tax returns won't be affected by proposed changes in how charitable contributions are deducted because they don't itemize their deductions, federal income tax records show.
That has not stopped charity and other officials from lobbying Congress to fight any change in deductions as part of the “fiscal cliff” negotiations. That's because they draw billions of dollars from donors who itemize, and a huge chunk of those donations come from taxpayers who earn more than $500,000.
That has placed advocates for the poor and needy in the position of lobbying for the nation's most advantaged.
Last week, a coalition of charity officials and recipients lobbied Congress for two days as part of what they called “Protect Giving — D.C. Days.”
“If taxpayers get no benefit for deductible expenses above a certain amount, say $50,000, then there is no tax incentive to have expenses once the cap is reached,” said Roger Colinvaux, an associate professor at the Columbus School of Law at Catholic University.
Tax records show that any change in deduction status will fall disproportionately on the nation's wealthier taxpayers, because: In 2010, only 32 percent of American taxpayers itemized their deductions, according to the most recent figures from the Internal Revenue Service.
Of those who itemized, 82 percent, or 38.3 million taxpayers, claimed a charitable deduction. Of those who made more than $500,000, 93 percent claimed a charitable deduction.
Those who itemized deducted a total of $170 billion in charitable contributions in 2010.
Anything that affects large donors could ripple through charities, said Steve Taylor, senior vice president for public policy for the United Way. Taylor's group, which works to help low-income people to financial stability through education and a healthy lifestyle, relies on high-income donors as do many large charities, he said.
Last year, President Obama proposed lowering the cap on charitable deductions from 35 percent to 28 percent for individuals making more than $200,000 a year and couples who earn more than $250,000. So where taxpayers in the top bracket currently get back up to 35 cents for every dollar given to charity, that would be reduced to 28 cents per dollar donated, according to a new report from the National Economic Council.
Mitt Romney floated several different caps to deductions as a part of his tax plan — limitations that would have likely caused a much larger dent in charities' coffers.
The White House Fiscal Commission's 2010 report proposed a 12 percent non-refundable tax credit for all taxpayers for charitable deductions including those in the top 2 percent.
Eliminating the charitable deduction completely is not realistic, Obama said in an interview with Bloomberg News last week.
“If you eliminated charitable deductions, that means every hospital and university and not-for-profit agency across the country would suddenly find themselves on the verge of collapse,” Obama said. “So that's not a realistic option.”
Charities are still alarmed by what has been proposed so far, Taylor said. “Americans are generous. They won't just stop giving, but they'll give less.”
Fewer than 1 percent of those who donate to the United Way — or about 26,000 people — give $10,000 or more per year. Their dollars make up 15 percent of the charities' $4 billion budget, Taylor said.
Some charitable deductions need changing, Colinvaux said, particularly the “in kind” donation of goods such as clothing, which is often overvalued.
Gene Sperling, director of the National Economic Council, said during a panel hosted by FixtheDebt.org that by implementing caps on deductions, policymakers would face widespread backlash, but lose billions by keeping it intact.
“It is hard to design a better way to unite the most-well off Americans and those representing the poorest Americans, nonprofits, churches, universities and hospitals, against a single idea than proposing to completely eliminate the charitable deduction,” he said. “If you then decide to make an exception for charitable deductions, your savings go down to anywhere from $350 billion to $450 billion.”
Obama told Bloomberg that Republicans proposing the closing of tax loopholes, including limits on deductions, could threaten the contribution tax break.
The White House spent last week making its case to the nonprofit community.
Senior Obama administration officials met with leaders from the nonprofit sector on Tuesday, according to a White House official who spoke anonymously because aides were not authorized to speak publicly. The official said administration officials also held a conference call with nonprofit leaders on Friday to outline the new National Economic Council report that highlighted “why taking tax rates off the table threatens nonprofits and charitable giving.”
In a Republican statement issued Friday, House Ways and Means Chairman David Camp, R-Mich., and Senate Finance Committee ranking member Orrin Hatch, R-Utah, accused the president of “bullying” the charitable giving community in an effort to raise taxes.
Nonprofit organizations should expect some pain from the ongoing budget talks, said Patrick Rooney, executive director of the Center on Philanthropy at Indiana University.
He added that not all charities would be affected in the same way.
“I don't think this will effect religious giving very much if at all,” Rooney said. “If you've committed to give 1 percent or 10 percent to your Mass, mosque, synagogue you're not likely to change that because it's a religious commitment. You're not going to change that because of a change in tax policy.”