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?