News and analysis
February 01, 2010

Budget Plan Revives President’s Call for New Charitable-Deduction Limit

President Obama renewed his proposal to limit the value of charitable deductions for wealthy taxpapers in the fiscal 2011 budget plan he presented today—refashioning it as a way to help provide tax relief to middle-income Americans.

The proposal would limit to 28 percent the tax break couples earning $250,000 (or individuals earning $200,000) could get for their itemized deductions, including gifts to charity.

The president proposed a similar limit in last year’s budget as a way to help pay for a health-care overhaul, but it was not endorsed by Congress.

This year, he included it in a package of proposals that he said sought to correct years of tax policies “that have disproportionately benefited high-income Americans and corporations” and produced a tax code that is “insufficient to meet national needs.” The White House said the change would raise more than $291-billion from 2011 to 2020.

The proposal is sure to spark a furious debate within the nonprofit world, which was divided over last year’s proposal. Many nonprofit leaders and fund-raising consultants condemned the proposed limit, which would also apply to deductions for mortgage interest and state and local taxes, saying it would dampen giving at a time when charities are reeling from the economic downturn. Some, however, defended it as a way to bring more equity to the tax code while also helping to pay for health-care changes that would help nonprofit groups.

The administration argues the current system is unfair because people in lower tax brackets get a smaller-percentage break for itemized deductions than wealthier taxpayers.

The president has paired the deduction limit with a proposal to end the tax cuts for wealthy Americans that were enacted during the Bush administration. That means the top tax bracket would rise to 39.6 percent next year, up from 35 percent now. Normally the value of itemized deductions is tied to a taxpayer’s marginal tax rate—the bracket that applies to the last dollars earned.

But if Mr. Obama’s proposal is adopted, wealthy people will be paying more in taxes while getting less of a tax benefit for gifts to charity.

Matt Dolan, a Washington tax lawyer, said the itemized-deductions cap would increase the after-tax cost of making a charitable donation by almost 20 percent for those in the highest tax bracket.

He predicts the proposal will be a hard sell since it would affect economic areas, including housing, "that are in very dire straits." The administration argues the economy will be in better shape by the time it would take effect.

Rep. Roy Blunt, a Missouri Republican, said he plans to oppose the president's proposal to limit the value of charitable deductions, a position he took last year as well.

"Raising taxes on families during a  recession is bad policy," said Mr. Blunt. "Raising taxes on those who want to help others is outrageous."

Rep. Blunt said that "we've seen in just the past few weeks in Haiti what the hard work and selfless giving of Americans can do in times of disaster. This tax hike will rob charities and churches of support for their good works in order to feed an ever-expanding government."