News and analysis
February 02, 2015

Obama Budget Again Calls for Limit to Charitable Deduction

Win McNamee/Getty Images

Updated on February 2, 2015, at 4:15 p.m.

Charity leaders expressed disappointment that President Obama once again pushed to limit the charitable deduction in the budget blueprint he sent to Congress on Monday.

Part of a massive $4-trillion proposal, President Obama’s plan would limit the value of all itemized deductions, including one for charitable gifts, to 28 percent for individuals who earn more than $200,000 and couples who earn more than $250,000.

The deduction's value is tied to a person’s tax bracket, so top earners in the 39.6-percent tax bracket can get a tax savings of 39.6 cents for every dollar donated to charity. If the deduction were capped at 28 percent, higher earners’ donations to charity would, in effect, be more expensive from a tax standpoint.

The plan, which is for the fiscal year that starts October 1, is expected to go nowhere in a Republican-controlled Congress.

It is the seventh budget President Obama has sent to Capitol Hill that calls for a limit on "tax expenditures," which are tax breaks for certain activities, like paying mortgage interest, spending on research and development, and donating to the local food bank or homeless shelter.

According to the White House, scaling back the charitable deduction for higher-income taxpayers "would make the tax code more equitable because the value of the tax expenditure as a percentage of the deduction is proportional to one’s bracket, so it is less valuable to those in lower brackets."

The budget plan follows a tax proposal President Obama made in January that would raise the capital-gains tax rate and close what the White House called the "trust-fund loophole," which limits heirs’ exposure to gains in the value of the assets they inherit. The president’s plan would subject appreciated value to the capital-gains tax but would provide an exemption if the assets are donated to charity.

Joanne Florino, senior vice president for public policy at the Philanthropy Roundtable, an organization that represents donors, said it was curious that President Obama exempted charitable gifts on those inheritances, yet is still pushing to limit the deduction over all.

"As in previous years, the White House is sending mixed messages to the charitable community about the value of American generosity," she said in an email. "It leaves us wondering why the president would hold charitable donations harmless in some areas of the tax code but not in others."

Vikki Spruill, president of the Council of Foundations, slammed the charitable deduction cap proposal.

"This misguided proposal would cost our most vulnerable communities the most and see the loss of billions of dollars in charitable investment,” she said in a statement. “This approach directly impacts the ability of donors to support vital services and removes a crucial incentive to give.”

Meanwhile, House Republicans are pushing to make a set of temporary tax breaks for charitable giving permanent. The tax benefits, for gifts of land for conservation purposes, gifts of food to food banks and other charities, and gifts made by retirees straight from individual retirement accounts, are part of a slate of about 50 temporary tax provisions called "extenders" that are usually renewed each year.

Last year, the House failed to pass a bill that would have split off the three charity extenders from the other tax breaks and made them permanent. House Democrats and President Obama, who threatened to veto the legislation, preferred to pass all the extenders together, rather than separating the items designed to benefit charity.

Before the previous Congress adjourned, it extended each of the three charity measures retroactively for the tax year that ended on December 31.

Late last month, Republican Majority Leader Kevin McCarthy of California laid out a plan for another vote to make the charity measures permanent and simplify the foundation excise tax. Instead of two rates of 1 percent and 2 percent, depending on how much money the grant maker has distributed to charity, the legislation would levy a 1-percent tax on all foundations’ investment gains.

Last summer the House passed a bill that would have lowered the excise tax to 1 percent for all foundations. In his budget proposal, Obama called for a 1.35 percent tax.

Sandra Swirski, executive director of the Alliance for Charitable Reform, a group founded as a project of the Philanthropy Roundtable, said she favored the lower rate.

“While we applaud the President for recommending a simplified private foundation excise tax, he has done so at a rate that will ultimately increase taxes on many grant making nonprofits,” she said in a statement.

According to the Council on Foundations, the House Ways and Means plans to begin debate on the measures on Wednesday.

Send an e-mail to Alex Daniels.