• January 27, 2015

Deficit Plan Would Eliminate Tax Deductions for Charitable Gifts

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Richard White/Chronicle of Philanthropy

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Richard White/Chronicle of Philanthropy

A high-level committee that offered a plan for reducing the federal government's debt today issued a proposal that would radically change the way the tax code treats charitable gifts.

The proposal would essentially eliminate the charitable tax deduction.

In its place, all donations made by federal taxpayers would qualify for a 15-percent tax credit. But instead of that credit going to the taxpayer, it would be given to the charity receiving the donation in the form of a matching grant from the Internal Revenue Service.

That setup would mean that when a donor wanted to give $100 to a nonprofit group, he or she could actually contribute $85. The government would cover the other $15, according to the proposal.

The plan, which was drafted by a 19-member committee of prominent Democrats and Republicans, called the way itemized deductions are currently structured—including those for charitable gifts—"perverse" because they give the biggest subsidies to high-income taxpayers.

The proposal, one of a wide range of recommendations on taxes and spending, aims to give all taxpayers the same benefits while reducing the size of the federal deficit.

"Restructuring the charitable deduction will greatly increase the number of taxpayers who receive a subsidy for charitable donations but will reduce the subsidy rate for upper-middle-income and upper-income taxpayers who itemize," the report said.

The plan, issued ahead of recommendations that are due by December 1 from a separate deficit commission set up by President Obama, was offered by a committee set up by the nonprofit Bipartisan Policy Center, which aims to be an "incubator" for public-policy efforts. That committee is headed by Pete V. Domenici, the Republican former chairman of the Senate Budget Committee, and Alice Rivlin, the Democratic former head of the Office of Management and Budget.

The committee also suggests creating just two individual income-tax rates—15 percent and 27 percent—to replace the current six rates that go up to 35 percent.

Currently, only taxpayers who have enough qualified expenses to itemize their charitable contributions can get the tax break, and those in higher tax brackets can write off a bigger percentage of their income than those in lower brackets.

The report says its proposal could broaden the pool of people who donate to charity but also change the composition of giving. "Charities favored by lower-income people (disproportionately religious organizations and organizations providing services for the poor) may benefit," it says.

Leonard E. Burman, a committee member who helped draft the recommendation, said he got the idea for a tax credit that would go directly to charities from a system used in Britain called "Gift Aid." That allows organizations to reclaim from tax authorities the amount people have paid in taxes on the money they donate.

Mr. Burman, a professor of public affairs at Syracuse University, said he envisages that charities could advertise to potential donors that the IRS will add value to their contribution, the way public radio advertises "matching gifts" when it asks listeners to donate.

He said it is not clear whether the proposed system would increase overall contributions. It could, in fact, decrease giving to organizations that rely heavily on major donors, like universities and opera companies, since high-income givers will lose the most in tax breaks, he said.

But he said the committee -- which also proposed replacing the mortgage-interest deduction with a tax credit that would go to lenders and be passed down to borrowers in the form of  lower interest payments -- was looking for ideas that would provide equal subsidies to all taxpayers and eliminate the need for so many tax forms.

The co-chairs of President Obama's deficit-reduction commission last week proposed several less radical changes to the charitable deduction, including allowing the tax break only for contributions that exceed 2 percent of adjusted gross income. Ms. Rivlin is also on that committee.


1. shyska - November 17, 2010 at 05:19 pm

I could see this as a nightmare for non-profit (public benefit) organizations waiting on checks from the federal government. Say a major donor wanted to donate $1 million for a campaign or for general operating, then paid the $850,000 cash to have the IRS pay the extra $150,000 - that's a huge chunk of funds to be waiting on the IRS for.

2. jonsil - November 17, 2010 at 05:39 pm

Obviously not a single soul on that committee with any knowledge of the non-profit world. This could be a death knell for charities!

3. donatecar - November 17, 2010 at 06:34 pm

Yup, this is not good for charites. Not many people will be willing to give away items if they only receive 15% of the profits. They will just sell them. This might cause some major problems in society. I hope that this bill does not have as much impact as I fear it might.

4. lhfoundation - November 18, 2010 at 09:15 am

First of all, this says that the government would "match" 15% of an individual's donation.

Since when does 15% of $85 equal $15?

How long until some of the less savory NPs floating around start reporting to the IRS donations that haven't actually occurred - or donations that are reversed once the government "match" is received? The potential for fraudulent activity here is amazing.

5. florino - November 18, 2010 at 01:38 pm

I would be happy to forego my charitable deduction if - and only if - it's part of an overall federal tax overhaul/simplification. I'm not holding my breath. In the meantime, I'd prefer that the government stay as far away as possible from my personal charitable choices. Forget the "match" - fix what's broken!

6. jhansinger - November 18, 2010 at 01:43 pm

This is a ridiculous proposal that would seriously hurt charities. I pray that it doesn't pass.

7. davidhimes - November 18, 2010 at 01:49 pm

Fortunately, the entire proposal from the Federal Deficit Reduction Commission is dead-on-arrival in Congress.

8. jasminacat - November 18, 2010 at 02:01 pm

As a professional fundraiser for 26 years and someone who gives over 10% of my income, it's likely even I wouldn't be as generous with my giving if this hairbrain scheme were given life.

9. dchudoba - November 18, 2010 at 02:03 pm

What a sad day it will be for all non-profits in the United States if this plan is passed! Our small non-profit relies on an array of government and private funding. This plan would create havoc for us if we had to wait for funds to come from the US Government instead of 100% of the donation coming directly from our donors. I definitely agree with other comments this will have very serious consequences for all non-profits, especially the small non-profits who rely on daily donations for paying basic bills such as heat, water, electric, rent and mortgage. I don't think the people making these decisions have a clue how very desperate some of the non-profits are right now ---- we are waiting on every donation received in the mail in order to ensure that we are able to deliver quality services to the families and children we serve so they can have a better life---let alone maintain the bare minimum that they are holding onto right now! Now the government is going to make it difficult for donors to continue to help ---- very sad, very bad idea all around......

10. jeffswan - November 18, 2010 at 02:16 pm

One more example of the federal government trying to make additional sectors of society dependent on the government instead of on the free will of individual citizens. It will be only a short time before the government decides to not give the money after all, or to decide that more and more nonprofits are not "worthy" of the federal "aid".

11. steveo9 - November 18, 2010 at 02:21 pm

This article confuses a few things. lhfoundation (#4) already points out the error as it pertains to the 15% match. $85 plus 15% is $97.75, and not $100. A donor has to give $86.96 to generate $100 for a particulary charity.

The article is also incorrect to suggest that "those in higher tax brackets can write off a bigger percentage of their income than those in lower brackets" with charitable contributions. The same percentage limitations on charitable deductions (50% and 30%) apply to all taxpayers that itemize, regardless of their tax bracket.

12. twhastings - November 18, 2010 at 02:24 pm

As a CPA and one who works with many nonprofits, I am so pleased to see the consensus sees this as junk. At the appropriate time, please, please contact your legislators.

13. smpiccolo - November 18, 2010 at 02:43 pm

It seems to me that the IRS giving a matching grant is ridiculous. I mean, are they going to be cutting checks to match every gift made in the US? Just think about how many $3 checks they'll have to send - seems like a huge waste of tax payer resources to me. There are far more small gifts then major ones.

14. developmentofficer10 - November 18, 2010 at 02:46 pm

I worked for a Government agency for 8 years and all I can say is..... VERY BAD IDEA. I too urge you to write your legislators, today.

15. wslayton - November 18, 2010 at 02:54 pm

This is the proverbial slippery slope. Once passed, it would only be a matter of time before the government would be dictating to charities what they have to do to receive their federal funding. For religious organizations, particularly private schools, the government would eventually (with pressure from the ACLU) refuse to pay those schools that include prayer.

16. lhfoundation - November 18, 2010 at 03:02 pm

Okay, here's a kicker - how is the government going to handle a 15% match to those anticipated $125 BILLION promised by our Giving Pledge participants? Right.

Not to mention, that will be taxpayer money, and some folks will be peeved to see Planned Parenthood get checks, or some church or another - you name it!

This whole plan is better scaled to a parent incentivizing their kids' savings.

17. amiesf - November 18, 2010 at 03:39 pm

As someone who has been calling (and calling and calling) the IRS to straighten out the refund status for one of my household employees, the thought that nonprofits would have to fight tooth and nail for every $100 "match" from the IRS is frightening. Furthermore, donor intent would be the farthest thing from the IRS' intent.

18. damestephanie - November 18, 2010 at 04:13 pm

This is the worst idea I ever heard. While charities and non profits get money from the government.... not every body that could 'take up' the gift aid option, does.... Why? Because they have to tick a box, they have to do something extra in the beurocracy and people just don't do it.. Also, if everybody ticked the box to take advance off gift aid the government would have to give the charities like £800 million more funds. (it may not be that high but it is likely near that.) The charities can also begin to lobby for 'more' of the money as they have done here in Britain.... It's $15 of the $100 today, tomorrow they will want more and pretty soon the charities are having more of a relationship with Government than they are with the Donor. This is a disaster waiting to happen.

Roberta d'Eustachio
Chief of Staff to the British Government's Founding Ambassador for Philanthropy, Dame Stephanie Shirley

19. marscott - November 18, 2010 at 04:14 pm

What a disaster - I can't even imagine the extent of the negative impact on non-profits. Indeed it would disincentivise the largest donors who give the largest amounts to the non-profits. The admirable American philanthropic sector which makes up for the services NOT provided by the government will crumble. What possible sense does it make to equalize the % impact of the charitable deduction across income levels? Lower income people can understandably not afford to give as much to charity, and this will not change that. It will simply reduce the incentive for large donors to give the already substantial sums they provide. Surely this will not pass...

20. lorraine - November 19, 2010 at 12:36 pm

Yet another stroke of brilliance from our politicians. Clearly none are very charitable or they would realize the folly of their ways without being told. This would work perfectly with the people who are now trying to decide our estate tax, which was zero this year (with major cap gains implications). If they're not going to help nonprofits, at least don't go out of the way to hurt them. How is it that nonprofits are bearing the tax burden created by our government's over spending??!!

21. jameyc - November 22, 2010 at 07:55 am

Does anyone really expect the government to hand out checks to churches, synagogues and every other faith-based organization in the country and not require them to follow federal guidelines for hiring, firing, etc.?

22. dbroussard27 - November 22, 2010 at 09:45 am

If there's one thing that the government should steer clear of it's our philanthropic sector. Countries in Europe - France most notably - have been long-time admirers of our philanthropic practices. To institute government intervention at any level is ridiculous.

23. jgelliott - November 23, 2010 at 12:59 pm

America, is without doubt, the most generous nation on earth. Radical change to the charitable gift deduction would significantly impact many of our organizations. Those from lower socio-economic backgrounds already give a higher percentage of their net-income to charity. If anything, we should be seeking additional ways to encourage greater generosity from the wealthy in our country.

24. dauterson - November 29, 2010 at 02:59 pm

This sham is an outrage. The same idiots who spent us into this mess now claim new ways to correct it. I, for one, do not want the government in the charitable sector. I do not trust them to keep their word - I would fully expect them to keep the money.

Here's a radical thought for the beltway morons - STOP SPENDING. Cut back - begin with your bloated personal benefits package.

Many were voted out earlier this month - many more the next time if they continue floating these "solutions."

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