In 1917, Congress passed an amendment to the four-year-old federal income tax that allowed individuals to deduct charitable gifts from their taxable incomes. Since that time, considerable research has shown that allowing a charitable deduction for those who itemize their tax returns has been an effective way to increase philanthropic activity. At present, those who itemize their tax return realize a reduction in taxable income equal to the amount of the total of all deductions, including those deductions related to charitable giving. In practice, this means that every dollar deducted generally reduces taxable income by the same amount; the actual value of that deduction depends on a taxpayer’s tax bracket. For a household in the highest tax bracket (currently 35 percent), every $100 given to charity saves $35 in taxes.
The Obama administration is proposing a number of modifications to the tax code, one of which would limit the value all deductions in 2012, including those taken for charitable giving, for high-earning households (households with annual adjusted gross incomes exceeding $200,000, or $250,000 for couples). Under this proposal, the Obama administration is seeking to place an upper limit on the value of all itemized deductions to 28 percent, regardless of tax bracket. Therefore, under the administration’s plan, a $100 gift to charity will reduce taxes by no more than $28.
Additionally, existing tax breaks in place since 2001 are set to expire at the end of 2012; should that occur as planned, high-income households would be taxed at a higher marginal rate in 2013 (39.6 percent) than they are currently paying. As a result, high income households may have to pay more taxes than they do at present and may have less disposable income for other expenditures, including charitable giving.
In consideration of this plan, the Center on Philanthropy at Indiana University, with sponsorship from Campbell & Company, seeks to
forecast whether these changes would negatively Preface impact charitable giving; and if so, to what degree. To that end, this analysis estimates the potential decrease in total giving that could occur with the capping of deductions and allowing existing income tax breaks to expire had the proposals been initiated in 2009 (Year 1) and 2010 (Year 2). Using methods developed in other research, the Center is able to estimate the effect of reducing the value of the tax deduction on charitable giving. The results of our analysis indicate that if the administration’s proposals are enacted, a relatively modest decline in charitable giving is likely to occur. Assuming the tax proposals are adopted by Congress, itemized charitable giving could be expected to decline by $0.82 billion in Year 1 when the deduction cap is implemented, and could decline by $2.43 billion in Year 2 when existing tax breaks expire (with the deductions cap remaining in place). In total, this represents a decrease of 1.3 percent in itemized charitable giving in Year 2.