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Will wealthy donors contribute less to charity under the Obama budget proposal that would reduce their tax savings?
Some foundations, non-profits and fundraising professionals are speaking out against the plan. But others, including tax experts, say the question is more nuanced and the impact unlikely to be so drastic.
Clinton Stretch, a principal in the Washington office of Deloitte & Touche, advises clients on the federal budget and tax issues. The concern for nonprofit groups "is real, but it's not absolute," he told Bloomberg News. "There are multiple ways people go about giving, and multiple reasons people go about deciding to do it."
Obama's plan is expected to generate an additional $318 billion over 10 years by reducing tax deductions for top earners, including deductions for charity. The proposal limits the value of itemized tax deductions to 28 percent for about 2.6 million U.S. households that fall into the top two income tax brackets, beginning in 2011. Currently they can deduct up to 35 percent of charitable contributions.
While applauding the overall budget, the Association of Fundraising Professionals (AFP) and the Association for Healthcare Philanthropy (AHP) oppose the proposal, saying it "sends the wrong message at the wrong time to those who support charitable causes."
The plan "would effectively devalue charitable gifts made by the very people who are in a position to make substantial donations at a time when they are sorely needed," the association said.
Independent Sector, a coalition of 600 nonprofit groups, opposes the measure as a "disincentive" to giving in challenging economic times.
Council on Foundations CEO Steve Gunderson said he is still reviewing the implications, but "we are opposed to proposals which will significantly depress incentives for charitable giving."
While some may look at the increased cost of making charitable contributions and reduce their giving accordingly, "I find it hard to imagine that this will occur on any significant scale," says Jane Searing, CPA at Clark Nuber in Bellevue, who provides tax services to private foundations and public charities.
For one thing, they would have to pay tax advisers for their time.
"By the time the taxpayer pays the adviser to figure out how much to reduce their contribution to get to the same after tax position, they could have just made the charitable contribution that seems appropriate based upon other factors," Searing says.
The charitable contribution deduction is meant to be a more efficient means of getting money directly to organizations that serve the public good rather than paying more taxes and having the federal government distribute funds to charitable organizations.
For married people filing jointly or head of household taxpayers, the proposal applies to people with taxable income slightly more than $200,000, according to Searing.
"I am not convinced that the reason these folks give is to get a tax deduction," Searing says.
Besides, she notes, many households in the top income brackets already have the value of their deductions reduced to 28 percent by the alternative minimum tax, which is designed to limit the use of deductions and exemptions by the wealthy.
The stimulus package authors are betting that people in these higher income levels will give as they normally have and take the tax hit.
Lauren Bricker, co-founder of the Two Herons Foundation in Seattle, says "speaking from personal experience, if we were looking solely at maximizing our tax break [from a big sale of stock as we were] we might reduce our giving...
"However, we were also looking at what's the best number for starting a foundation from the perspective of how much the fees would be to roll out our own vs. putting our money in the Seattle Foundation. If [the 28 percent deduction] got us in the ballpark, but not quite enough to make doing our own foundation reasonable, I bet we would have bumped it up anyway." At least if recent history is any judge, caps on deductions didn't stifle the growth of giving.
Between 1990 and 2001, a period when the minimum tax was increasingly limiting deductions for six-figure income households, deductions for charitable giving actually grew more than 8 percent a year, according to a Bloomberg story that cites an Internal Revenue Service study.
But of course the U.S economy today looks very different from what it was in the 1990s.