The Future of Charitable Deductions

The Nonprofit Law Prof Blog has an interesting post on the Senate Democrats 2014 budget proposal.  In looking for deficit reductions one possible method is an across the board limit on tax expenditures by high income taxpayers.  The bottom line is the charitable deduction may be soon, if it is not already in the cross hairs.

The Nonprofit Law Prof Blog reports

The Senate Budget calls for deficit reduction of $975 billion to be achieved by eliminating loopholes and cutting unfair and inefficient spending in the tax code for the wealthiest Americans and biggest corporations. It recognizes that the Finance Committee, which has jurisdiction over tax legislation, could generate this additional revenue through a variety of different methods.

One potential approach is an across‐the‐board limit on tax expenditures claimed by high‐income taxpayers (specifically, the top two percent of income earners). This could take the form of a limit on the rate at which itemized deductions and certain other tax preferences can reduce one’s tax liability, a limit on the value of tax preferences based on a certain percentage of a taxpayer’s income, or a specific dollar cap on the amount of allowable deductions. In assessing any such across‐the‐board limit, Congress should consider the extent to which each proposal would retain a marginal tax incentive to engage in the affected activities and investments.

Another potential approach by which Congress could increase tax fairness and reduce the deficit is by reforming the structure of particular tax expenditures. The Simpson‐Bowles illustrative tax reform plan, for example, proposed to convert certain itemized deductions into limited tax credits, which more equitably deliver tax benefits and, because only about one‐third of taxpayers itemize their deductions, are often better for targeting tax incentives at low‐income and middle class families. Reforms like these could also generate substantial new revenue for deficit reduction.

See Foundation for Growth: Restoring the Promise of American Opportunity, page 66 (emphasis added).  As a reminder, the charitable deduction is an "itemized deduction."  Therefore, the charitable deduction will be limited by any indiscriminate cap on itemized deductions, whether expressed as a percentage of income or a specific dollar cap.   One could guess that the caution highlighted above in bold might have been aimed specifically at the charitable deduction, although the mortgage interest deduction might lay a claim to such specific attention.  The nonprofit sector may have the most about which to worry, as charitable contributions are voluntary and easy to eliminate out of one's personal budget, if a taxpayer choose not to spend above the allowable deduction cap.

Source:  The Nonprofit Law Prof Blog