Obama Plan Would Reduce Charitable Deduction for Some Wealthy Donors
Feb. 26, 2009, Chronicle of Philanthropy — President Obama today proposed to cap the rate that high-income taxpayers can use to claim charitable deductions as part of a plan to finance changes to the country’s health-care system.
In a document outlining his 2010 budget plans, the president proposes to limit the tax rate for itemized deductions at 28 percent for families making more than $250,000.
That would reduce by as much as 20 percent the amount wealthy taxpayers could reduce their federal tax payments for charitable donations. Under the current system, taxpayers who are in the 33 percent or 35 percent tax brackets use that rate to claim deductions.
The proposal would raise $318-billion over 10 years, the plan says. That money would help pay for a 10-year $630-billion reserve fund designed to help make health care more affordable and available.
“With this budget, we are making a historic commitment to comprehensive health-care reform,” President Obama told a news conference. “It’s a step that will not only make families healthier and companies more competitive, but over the long term it will also help us bring down our deficit.”
‘Rebalance the Tax Code’
The proposal to limit the itemized-deduction rate is included in a package of measures designed to free up money for the reserve fund, including reducing Medicare overpayments, cutting drug prices, and improving post-hospitalization care as a way to reduce readmissions.
The plan is an effort to “rebalance the tax code so that the wealthiest pay more,” the document says.
But the idea is raising concerns in the nonprofit world.
Sheldon Steinbach, a lawyer in Washington who represents colleges and universities, said the proposal comes at a time when many nonprofit groups are already facing decreased resources. As a result, the plan could have drastic consequences for many groups.
“Any disincentive to charitable giving, especially in the current economic climate, will have an impact far beyond the black letter law,” Mr. Steinbach said. “It will have an exponentially negative impact.”
But while many charitable-giving experts expressed alarm about how reduced rate for charitable deductions would affect giving by wealthy Americans, others said that Mr. Obama’s proposal may be less cause for concern than it initially appeared.
The reason: Many wealthy Americans who would otherwise be in the 33- or 35-percent tax bracket — and thus able to take that same percentage deduction for their charitable gifts — have used mortgage payments and other deductions to qualify for the alternative minimum tax rate of 28 percent, said Robert F. Sharpe, a Memphis planned-giving consultant.
By paying the alternative minimum tax rate of 28 percent, those wealthy taxpayers are already restricted to the same percentage on their charitable deductions, Mr. Sharpe said. “A lot of the rich are already used to the 28-percent deduction,” which means the Obama proposal would not result in any change for them.
Impact on Large Institutions
Bruce Flessner, a fund-raising consultant at Bentz Whaley Flessner, in Minneapolis, says the plan would likely have little impact on organizations that have a broad base of donors. But large institutions — particularly colleges and universities and academic medical centers — could be particularly hard hit if the plan moves forward.
“It seems like unusual public policy to try, as the President announced to the Congress this week, to return the United States to world leadership in access to higher education and then make it more difficult for extraordinary donors to contribute great gifts to colleges and universities,” Mr. Flessner said. “Likewise, it seems like unusual public policy to penalize the great medical centers that contribute so much to scientific breakthroughs by making it more difficult for donors to make the six-, seven-, eight-, and nine-figure gifts.”
