How Deficit-Reduction Plans Would Treat Tax Breaks for Charitable Gifts

The National Commission on Fiscal Responsibility and Reform

The commission, appointed by President Obama, offered a preliminary plan by the co-chairs, Erskine Bowles, Democrat, former chief of staff to President Clinton; and Alan Simpson, Republican, former U.S. senator from Wyoming, that includes three possible options, with cuts beginning gradually in the 2012 fiscal year.

Option one

Eliminate all $1.1-trillion in federal tax breaks, including charitable deductions. Set aside $80-billion to cut the deficit. Create three individual income-tax rates, from 8 percent to 23 percent, instead of the current six rates from 10 percent to 35 percent. Pay for any tax break that is added back in by increasing the tax rates.

Pros for charities: Lower tax rates would give potential donors more money that they could spend on charity. Taxpayers, charities, and IRS would have less paperwork.

Cons for charities: End to deduction would remove incentive for charitable giving.

Option two

Increase the standard deduction for married couples to $30,000 (up from the current $11,400). Allow deductions for charitable gifts only for amounts above 2 percent of adjusted gross income.

Pros for charities: Higher standard deduction would give taxpayers more money that they could spend on charity. More taxpayers would take the standard deduction, meaning less paperwork for them and the IRS.

Cons: Only wealthier taxpayers would find the charitable deduction more attractive than the standard deduction, meaning lower-income taxpayers would lose an incentive for charitable giving.

Option three

Ask Senate Finance Committee and House Ways and Means Committee to overhaul the federal tax code by the end of 2012 (creating a simpler system with lower rates, fewer tax breaks, and better enforcement of tax laws). If that does not happen, taxpayers could take only about 85 percent of the value of their itemized deductions, including for charitable gifts, in 2015. That percentage would fall over time until the tax overhaul is completed.

Pros for charities: Because the cut to the charitable deduction would be gradual, the impact on giving could be less drastic than other proposals.

Cons: The IRS would have a big job teaching taxpayers how to calculate their deductions, especially if the percentage they can claim keeps falling.

Debt Reduction Task Force, Bipartisan Policy Center

Co-chairs Pete V. Domenici, Republican, former Senate Budget Committee Chairman; and Alice Rivlin, Democrat, former director of the Office of Management and Budget, offered this plan.

Eliminate both the standard deduction and itemized deductions; end most other tax breaks. Would save more than $3-trillion between 2012 and 2020.

Create just two income-tax rates, 15 percent and 27 percent, and a national sales tax.

Charitable donations (and mortgage interest for a principal residence of up to $25,000) would be eligible for a 15-percent tax credit, whether or not the taxpayer owes any income tax. The charity would get 15 percent of two figures added together: the donation it received plus the money the donor would have received if he or she had gotten a 15-percent tax credit. So if a donor sent $85, the charity would get an additional $15.

Pros for charities: All donations would be treated equally, unlike the current system in which only taxpayers who itemize get deductions and people in higher tax brackets get a bigger subsidy. Charities favored by low-income donors who now do not itemize—for example, social-services organizations and churches—could benefit most. Charities could advertise the IRS’s extra donation as a way to attract gifts.

Cons: End to deduction would remove an incentive for charitable giving. This could especially harm groups like universities and cultural institutions that rely on higher-income donors, whose giving is most influenced by tax incentives. Charities could face administrative burden of proving donations came from federal taxpayers. Decisions made by the federal government about how to distribute the tax credits could be influenced by political considerations.