• November 1, 2014

Charitable Deduction Not Touched in Debt-Ceiling Deal

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Richard White/Chronicle of Philanthropy

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Richard White/Chronicle of Philanthropy

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Editor's note: This article was updated to reflect the passage of the debt-ceiling legislation into law.

A new law to increase the debt-ceiling limit does not make any changes in the tax deduction that donors receive for making charitable gifts.

The law, which President Obama signed Tuesday, seeks to trim the federal deficit by almost $2.5-trillion over the next 10 years. It identifies $900-billion in spending reductions now and requires Congress to pass $1.5-trillion more in cuts by December 23. It is in that process that reducing the value of the deduction or eliminating it altogether could come under consideration.

The new law calls for a 12-member “super” committee made up of six Democrats and six Republicans to meet over the next few months to identify the further cuts.

“We assume that the new committee will certainly consider the cap on deductions,” said Jason Lee, a lawyer for the Association of Fundraising Professionals, a trade group that is opposed to reducing the value of the charitable deduction. “So we’re working under the premise that we still have our work cut out for us.”

Cuts Harder on Charities

No matter what happens with the charitable deduction, the spending cuts outlined in the debt law could be far more significant for groups that rely on federal money.

While it is unclear what programs would be cut, experts predict that few social or arts programs would be spared.

“We’re pleased that the threats to charitable giving incentives did not materialize in this agreement,” said Robert Lynch, president of Americans for the Arts, an advocacy group, but he said that $2-trillion in spending cuts could hurt nonprofits that work in the arts, education, and other causes.

Deduction Under Scrutiny

The charitable deduction, which many fund raisers say is a key motivation to persuade affluent donors to give large sums, has been under fire from President Obama and members of Congress who are looking to find ways to shrink the nation’s growing deficit.

In July an influential bipartisan group of senators called for a “reform” of the charitable deduction along with many other changes in the tax code.

The group said its overall recommendations were consistent with recommendations made last year by President Obama’s deficit-reduction committee, which suggested replacing the charitable deduction with a 12-percent tax credit. That would be less valuable to many donors than the current system, though some proponents say it would be fairer because the credit would apply the same way to all taxpayers. The charitable deduction applies only to donors who itemize and gives bigger savings to those in higher tax brackets.

In April, President Obama called for reducing the value of itemized deductions, including those for gifts to charity, by 30 percent for people in the top tax bracket.

Incentives Important

Such ideas and others could well be under consideration in coming weeks and months, experts say.

And it’s possible that some people in the nonprofit world are shifting their stance on the charitable deduction.

“We will continue to educate members of Congress on the importance of charitable-giving incentives,” said Sandra Swirski, executive director for the Alliance for Charitable Reform, a group that represents grant makers and donors and has long advocated for the tax break. “Note that I’m not saying we need a charitable deduction, I’m saying we need an incentive for charitable giving.”

Ms. Swirski says her group believes that Congress is likely to make changes in the tax code, and the group has been researching ways to promote charitable giving that don’t necessarily involve offering a tax deduction to donors.

“Charitable incentives are really broad; they can be anything that encourages charitable giving, directly or indirectly,” Ms. Swirski said. “The joint committee will take a hard look at all tax expenditures at all points in the code, and they’ll be asking folks to come in and justify their deductions or credits and where it can be modified to be more effective.”

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