president’s budget proposal

President Obama Proposes to Tax Charitable Giving by the Wealthy?

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.

Donor in Highest Tax Bracket

Current Law Proposed Law
Charitable Gift

$100,000

$100,000

Tax on $100,000 of Income

$35,000

$39,600

Tax Savings from Gift

$35,000

$28,000

Additional Tax Cost with Proposed Law for Donor in Highest Proposed Bracket    

$11,600

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?