Charitable Donations Under the Proposed Tax Plan

With the announcement of President Obama's new tax initiatives many charitable organizations are showing signs of concerns. The Wealth Report from the Wall Street Journal and the NY Times both ran interesting stories on the potential impact of the changes in the tax code, especially for charitable donations. Of course that is an area that is of great importance to personal property appraisers.

I dont wish to get into a political debate here on the blog, but I want to emphasize the potential impact on cultural giving as opposes to need based giving. We do have to separate charitable based donations for public services and the needs of individuals in despair and those donations which go to support our culture institutions and the arts which are of interest to the personal property appraisal profession. Many of these organizations, especially the smaller ones rely upon donations to fund exhibitions, accessioning of property and the overhead of operations.

Both articles have grabbing first paragraphs, the Wealth Report of the WSJ states "Charities and nonprofit groups are up in arms over President Obama’s proposal to limit charitable deductions" while the first sentence of the NY Times article states "Wealthy donors and the nonprofit groups they support were in an uproar over the Obama administration’s proposal to limit the value of deductions for charitable gifts, which was included in the budget the president presented to Congress."

The applicable portion of the code restricts charitable donors who earn more than $250,000 a year to a deduction limit of only 28% of the value of any donations. This is down from current rates of 33% or 35%. According to the budget, the increased tax revenue will help fund universal health insurance.

The WSJ Wealth Report states Charities, who often say in interviews that tax breaks aren’t the reason the wealthy give to charity, say the change will reduce giving. “During the current economic downturn, which has forced nonprofits to do more with less, any proposal which would result in a decrease in private giving will be a disaster for America’s charities, and for those who depend upon them,” United Jewish Communities told the Chronicle of Philanthropy.

The Wealth Report goes on to say as government takes on more and more social roles, there will be less need for donations, and instead of donations, higher taxes will fund the government programs. In certain circumstances I can see the point, but for cultural donations and not public need based donations I see problems. I can also see the ultra wealthy continuing their philanthropy, and for those who are not ultra wealthy, I believe charitable donations will be reduced. That is the area I am most concerned about. The smaller donor who might give $1,000 or $2,000 to a museum, historical society or organization like the Foundation for Appraisal Education, may now be inclined to reduce the donation amount. Many of these organizations are now struggling for survival, a reduction in donations would further impact their ability to operate. I believe this is true, especially in difficult financial times like we are now experiencing. As times get better, and they will, perhaps the impact will be reduced and giving and funding will continue at a high level.

The NY Times article states Fund-raising experts had a more subdued reaction.

“Research has shown again and again that for major donors, taxes are at the bottom of their list of reasons why they make these gifts,” said Margaret Holman, a fund-raising adviser in New York. “They make these gifts because they love, are intrigued by, want to invest in their favorite charities.”

Roughly half of the high net-worth donors responding to a 2006 survey by the Bank of America reported that they would keep giving the same amount to charity if deductions for that giving fell to zero, while about 38 percent said their giving would decrease somewhat. Only 7 percent said their gifts would fall steeply.

Again, I can see the point, but there are several issues to contend with. One is the current economic climate, where many of the wealthy have been hurt by declines in their investment portfolios. Also, the ultra rich will continue to give and continue their philanthropy, but those living on strong incomes, just above the $250k level may be less inclined to give and donate because of the reduced deductions. I can envision many tax payers above the threshold with families, as they plan for future college tuition payments and retirement savings reducing charitable donations.

Perhaps the good news on this front is the Washington Post ran a story on Sunday about the overall budget and stated Democratic congressional leaders say they expect to endorse Obama's agenda in April. But they warned that it will not be easy and predicted that a proposal to limit tax deductions taken by the wealthy for charitable giving, mortgage interest and other items may not survive.

So perhaps the proposed reduction for deductions of charitable donations will not be in the final bill. To read the Wealth Report from the WSJ click HERE and to read the NY Times article, click HERE.