Nonprofits Prepare for Debate Over Proposed Change to Tax Incentives for Charitable Gifts

For the third-straight year, President Obama has outlined a plan to reduce the value of charitable deductions for the wealthy. Could the third time be a charm?

Nonprofit experts say the proposal, unveiled in the president’s 2012 budget last week, faces long odds, but it could gain momentum if Congress decides to take aim at other vulnerable deductions, including one for mortgage interest.

“For this proposal to have legs, it will have to be coupled with the broader tax-reform effort,” says Roger Colinvaux, a former top aide to Congress’s Joint Committee on Taxation who is now an associate law professor at Catholic University.

In November, two prominent committees that focused on reducing the nation’s deficit proposed curtailing or ending the charitable deduction, among other recommendations. But it’s not yet clear whether Congress will aggressively pursue such controversial changes, even though proponents believe a tax overhaul would make the economy more efficient.

Reducing Value of Write-Offs

President Obama wants to limit itemized deductions, including charitable deductions, to 28 percent for taxpayers in the highest brackets.

The proposal would eventually reduce the value of itemized deductions for those in the top tax bracket by 30 percent. Without further action to extend the Bush-era tax cuts for the wealthy, the top tax bracket, currently at 35 percent, would rise to 39.6 percent in 2013.

The savings would be used to pay for a fix to the alternative minimum tax, which was originally designed to prevent wealthy Americans from escaping taxation by taking advantage of loopholes in the tax code, but is ensnaring a growing number of middle-class Americans.

Many advocates for charities say they plan to oppose the president’s proposal on the grounds that it would lead to declines in giving.

Martin Feldstein, an economist at Harvard University, estimated in 2009 that the change would cut charitable giving by $7-billion, but other estimates have forecast much smaller declines.

Diana Aviv, president of Independent Sector, a coalition of charities and foundation, says her organization took a middle-of-the-road position on Mr. Obama’s proposal in 2009, when he introduced it as a way to help pay for health-care reform. But Ms. Aviv says Independent Sector will oppose the limits on charitable deductions this year.

“There are many, many people in the charitable sector who will continue to be upset by this proposal, and believe that the president on this particular issue is wrongheaded,” Ms. Aviv says.

William Daroff, vice president for public policy at the Jewish Federations of North America, said in a statement that he was “dismayed” by the plan to cut incentives for giving.

“At a time when charities are helping more and more vulnerable people, who need more and more help, the government should not be placing a stumbling block in front of our ability to do good,” Mr. Daroff said.

Robert F. Sharpe, Jr., a Memphis fund-raising consultant, says the benefits that rich people receive from giving are “intangible” and shouldn’t be lumped with personal property.

“I don’t think charitable gifts fall into the same category as property taxes and mortgage interest for rich people’s houses,” he says. “I’ll go to my grave believing that.”

‘Suck It Up on This One’

But other people say the critics are overstating the impact of the proposed changes—and risk damaging the credibility of nonprofits if they start a strident fight against a change that would be likely to put the economy on sounder footing.

Tony Martignetti, a planned-giving adviser in New York, says the majority of charities receive no support from wealthy donors and would not be hurt by the proposed change.

“I say let’s stop squawking, suck it up on this one, and get back to fund raising,” he says.

In his 2012 budget, Mr. Obama also said he thought that the estate-tax legislation he signed in December, after compromising with Republican lawmakers, was too “generous.”

In 2011, the tax rate is set at 35 percent and allows couples to pass estates as large as $10-million to their heirs tax-free. Mr. Obama said he wants to return to 2009 levels, when the first $3.5-million was exempt from tax, and the tax rate was set at 45 percent.