For those ineligible or uninterested in itemizing their deductions, charitable giving remains a truly selfless endeavor. But for an “itemizer,” the marginal tax rate determines the deduction that they receive. The higher their rate, the more they save in taxes when making a charitable gift.
Put another way, the higher the rate, the less it costs to make a charitable gift. For example, if a dollar of your income earned is taxed at a rate of 25 percent, giving that dollar away to a cause that you support only costs 75 cents. This is because if the dollar were retained, a quarter of it would be owed to the IRS.
In recent years, lawmakers and economists have been struggling to balance the federal budget. During the process, some have come to label this foregone revenue as a “tax expenditure.” They argue that the government is simply spending money to help certain taxpayers make charitable gifts.
This is important, because if lawmakers fail to balance the budget by raising taxes, they will look to cut expenses or find other sources of revenue. By broadening the definition of an “expense,” government officials make room for decreasing not only what traditionally comes to mind – such as money devoted to national defense or human services – but also tax expenditures.
Congress and the administration are already actively reviewing ways to increase tax revenue without increasing tax rates. This, in turn, is putting pressure on many types of itemized deductions, including the charitable deduction. That pressure might lead to any of the following:
• Eliminating all itemized deductions in general or the charitable deduction in particular
• Reducing the portion of one or more deductions that can actually be claimed (for instance, allowing a taxpayer to deduct only 60 percent of his or her actual charitable gifts)
• Curtailing the benefit associated with deductions claimed by those in higher marginal brackets (one example being President Obama’s proposal to require those in brackets above 28 percent never benefit from itemized deductions as though they were still in that bracket)
• Introducing a floor for charitable deductions (e.g., only total gifts in excess of $5,000 would be deductible)
• Replacing the charitable deduction with a charitable credit, meaning the resulting tax savings would be the same for everyone, regardless of their tax bracket
The law might also be revised to permit the IRS to tax a donor on some or all of the capital gain in long-term appreciated assets transferred directly to a charity, which is not currently taxed.
Whatever the outcome, donors will find it more important than ever to work with their financial advisors, understand the options available and pursue those that are appropriate. Experienced nonprofit representatives can also be helpful in this collaborative process.
However, with the preservation of charitable giving incentives becoming a tall order in the current political and economic climate, you may find more reliable charitable giving options this year. At least for the remaining weeks of 2012, you can expect the law to remain unchanged. This affords donors an opportunity to make gifts with clarity about what their tax outcomes will be.
So, while our altruistic tendencies make charitable giving feel special in any year, our financial well-being makes philanthropy look particularly attractive prior to 2013.
If you ask me, it’s time to give – while the giving is really good.
Mary Pringle, CPA, CGMA has more than 20 years of experience working with unique charitable planning needs. She currently serves as the chief financial officer at the Community Foundation for Southwest Washington. You can contact her by calling 360.694.2550 or by emailing mary@cfsww.org.
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