As part of the President’s FY 2012 budget proposals, the Administration is proposing to decrease the value of charitable deductions and all other itemized deductions for individuals earning over $200,000 and couples earning over $250,000.

For these higher earners, this proposal caps off deductibility at 28% for charitable gifts and all other itemized deductions including mortgage interest and state/local taxes. In other words, these individuals, likely in the highest federal income tax bracket of 39.6% (also proposed), would only be able to receive tax credit for 28% of the value of their itemized deductions.

A real dollar example:  A donor who makes a fully deductible charitable gift of $100,000 who is in the top federal tax bracket of 35% (current highest bracket) under today’s law would reduce his/her taxable income by $100,000 and thereby save $35,000 in taxes.  This some donor, under the proposed law, would only be able to apply any tax saving for this charitable gift as if he/she were in the 28% bracket, thus only saving $28,000 for the same $100,000 gift.  Coupled with the proposed increase in the top tax income tax bracket to 39.6%, the increased cost of this gift to the donor would be $11,600 more under the proposed law.

A more simple approach:  President Obama is proposing a $11,600 penalty tax on every $100,000 of charitable gifts made by the wealthy.

While this proposal is startling, there is a bright side to this story:  this is the third year in a row that the President’s budget included such a proposal.  Congress rejected it the first two times.  What is the chance that a now-Republican controlled Congress will even give this one a second thought?