Just picture all of the starving children and imprisoned puppies. That’s exactly what opponents of proposed changes to the 96-year-old charitable giving tax exemption want public opinion to center on. But those who do support some sort of fundamental change will counter with images of a bedraggled, homeless Uncle Sam begging for food money on a street corner somewhere. The question is, who’s right?
It’s hard to decipher right from wrong when you’re ostensibly choosing between the lifeblood of philanthropy and the federal government’s long-term financial security, especially since both sides will quote their fair share of supporting research. Further complicating matters is the notion that this needn’t really be a disparate, cause-and-effect type of decision. In other words, changing the way people approach charitable giving with tax implications in mind isn’t the only way to skin the budget cat.
What this all really boils down to is the fact that the government desperately needs money to close our $759 billion budget deficit, reduce the ever-growing $17 trillion national debt, and calm market concerns over an uncertain economic outlook. It is with these things in mind that the Obama administration has been trying since 2009 to replace the existing federal subsidy on charitable donations (which is currently capped at 39.6% for people in the highest tax bracket) with a 28% cap. By limiting charitable deductions to 28 cents on the dollar, experts believe the government would essentially bolster its annual revenues with $5 - $9 billion that would have originally gone to charities.
While that would only represent a drop in the bucket compared to what we truly need to solve our fiscal woes, it’s not the only plan on the table. Others have proposed replacing the charitable tax deduction with a refundable tax credit in order to reduce the current bias toward wealthy individuals who itemize their deductions (currently the only way you can take advantage of this incentive). Still others support doing away with the distinction between itemizers and non-itemizers as far as charitable giving is concerned or capping all itemized deductions at a certain dollar amount.
Each of these proposed plans has its own merits and drawbacks, but before you cast your lot with any one of them, there are a few things that bear mentioning.
- Only one-third of all households itemize their deductions each year. But that includes nearly 40 million Americans who claim the charitable giving tax deduction.
- Out of the roughly $39 billion in charitable deductions taken each year, $33 billion (or about 85%) goes to the wealthiest 20% of households, according to the Congressional Budget Office. The top 1% of earners also reaps more benefit than any other cohort.
- People give more money to religious groups like churches and synagogues than any of the other organizations that are eligible for deductible donations, according to Giving USA reports.
- In 2011, Hawaii instituted a cap on itemized deductions, resulting in only 117 fewer people claiming charitable deductions compared to the year before, according to the Pacific Business News.
- During recent Congressional testimony, Brian Gallagher – president and CEO of United Way – said that a 28% cap on charitable deductions would reduce donations to the organization by $100 million each year.
Armed with that background, it’s probably a good idea to also consider what leading experts on tax policy and non-profit organizations have to say about potential changes to the charitable giving tax deduction before you make up your mind on the matter. WalletHub turned to a few of these folks for ideas on how the government can/should/will handle this issue, and you can check out what they had to say below.
- Will Changes be Made to the Charitable Giving Tax Deduction?
- How Would Changes to the Charitable Giving Tax Deduction Affect Individuals, Government, and Nonprofit Organizations?
- How WILL This Situation Ultimately Play Out?
- How Would YOU Alter the Tax Code as It Relates to Charitable Giving?
- There has been a lot of talk lately about altering the charitable giving tax exemption for individuals – what, if anything, will eventually come of this?
- How would a cap on deductible donations or a move to a refundable credit affect individuals, government, and nonprofit organizations?
- Could the problem (if there is one) be instead with how tax-exempt organizations are classified? For instance, there are more than 1 million tax-exempt organizations in the U.S., including giants like the NFL.
- If it were up to you, how would you alter the tax code as it relates to charitable giving and tax-exempt organizations?
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