News and analysis
January 02, 2013

Nonprofits Call Cliff Deal a Victory on Giving Incentives

Nonprofit officials declared a victory in their advocacy to preserve the charitable tax deduction after Tuesday’s Congression­al vote to avert the fiscal cliff. But they remain frustrated that Congress did not resolve the $55-billion in federal spending cuts that are expected to hit social-service nonprofits particularly hard.

While Congress passed some minor limits on itemized deductions that will affect the affluent, it didn’t take more potentially damaging actions affecting charitable giving that lawmakers and the White House had promoted in recent months.

Even so, nonprofits expect continued struggles because the deal approved this week included a promise that Congress would work on a serious tax-overhaul measure this year.

“We have won a battle, but we have not yet won the war,” said Diana Aviv, chief executive of Independent Sector, an association of nearly 600 nonprofits.

Limits on Deductions Avoided

The legislation that Congress passed Tuesday raises the top tax rate to 39.6 percent on incomes over $450,000. The deal did not include proposals to cap the tax savings that wealthy taxpayers get for itemized deductions, including those for charitable gifts, local taxes, and mortgage interest.

President Obama has long supported a 28-percent cap on the tax savings wealthy donors receive when they write off their charitable gifts and other items. Some Republicans had called for a dollar limit of up to $75,000 for all deductions.

Charities say both approaches would reduce the financial incentive for donors to give, but neither ever made it into the final legislation.

“The fact the charitable deduction was preserved is a huge victory for us,” said Sandra Swirski, executive director of the Alliance for Charitable Reform. “As tax reform unfolds [this] year, we will continue to fight hard to preserve the charitable deduction.”

Obama Wants Cap

The charitable deduction will continue to be tied to a donor’s tax rate under the legislation passed this week. That means that a charitable gift of $1,000 would provide a $396 tax savings for someone in the 39.6-percent tax bracket. Had a 28-percent cap been imposed, the savings would have fallen to $280.

President Obama, however, remains committed to pursuing a cap on the charitable deduction, according to a White House official who asked not to be named.

“We know the fight’s not over,” said Steve Taylor, vice president for public policy at United Way Worldwide.

Retirement-Plan Donations

The deal provided two other items of good news for nonprofits. It extended tax-free distributions from individual retirement plans for charitable purposes for people over age 70&frac;. And it extended a provision permitting businesses to claim a deduction for donating surplus food to charity.

But it also contained a minor limitation on itemized deductions that nonprofit groups such as the Alliance for Charitable Reform and Independent Sector had opposed because they fear it could reduce charitable giving.

Under the law, taxpayers who make $300,000 or more face small limits on the amount of deductions they can claim; the limits in essence amount to about a 1-percent tax increase for most people, tax experts say. A similar limit was in effect until 2010.

William Daroff, vice president for public policy at the Jewish Federations of North America, said the limitation will “have a minor impact on charitable donations.”

Spending Cuts

One major issue that Congress did not deal with in Tuesday’s vote was the $110-billion in federal spending cuts that were scheduled to take effect this week.

Instead, Congress delayed them for two months. Half of those cuts would be aimed at domestic social programs, many of which are administered by nonprofits or serve people who would turn to nonprofits if they lost their federal aid.

Mr. Daroff said the delay would help nonprofits make the case that cuts to social programs would hurt many communities. “It gives us another two months to fight,” he said.

Tim Delaney, chief executive of the National Council of Nonprofits, said the delay in cuts leaves nonprofits guessing about how to budget for 2013.

“If you’re running a nonprofit, you don’t know if you should be firing people, furloughing people, or hiring people. It’s fundamentally unfair for people who are trying to implement agreements that have been signed by governments,” Mr. Delaney said. “Bottom line: I still have my seat belt strapped on as we’re going up and down this wild, crazy, and unnecessary and harmful fiscal cliff exercise.”

Suzanne Perry contributed to this article.

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