Cap on charitable deductions will impact top 1% of U.S. Households

March 3, 2009

Nearly 99% of all American households would see no impact from a plan in President Obama's 2010 budget limiting the tax deduction wealthy families can claim for charitable giving.

The Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution, found that the plan would impact only 1.2% of U.S. households and has the potential of reducing charitable giving by 2%. The Center on Budget and Policy Priorities calculated that charitable giving would decline by an estimated 1.3% because of the tax change. Meanwhile, new revenue generated from the Obama plan would finance expanded health care coverage, reducing charities' costs for health care and health-related services.

The Obama plan would limit the amount the wealthiest families can deduct from their taxes for charitable contributions. It would reduce the maximum value of the deduction from the current 39.6% to 28% of the amount contributed -- the same rate as during the Reagan years. The change would impact families in the top two tax brackets, those with incomes exceeding $250,000 a year. Middle-income Americans currently receive an individual income tax subsidy of 10 cents or 15 cents for every dollar of their charitable giving, if they itemize deductions.

The proposal would not take effect until January 2011, so it is unlikely to impact charities during the current recession. Additionally, as the Center on Budget and Policy Priorities pointed out, the Obama administration is proposing to freeze the estate tax as it exists in 2009. The estate tax is a strong incentive for charitable giving, so Obama's plan will actually yield more donations from estates than under competing proposals to curtail or do away with the estate tax.

You can read more about the Tax Policy Center's analysis of the charitable deductions change, and an analysis of the issue by the Center on Budget and Policy Priorities in Washington, D.C.