More On Tax Planningfrom The Advisor's Professional Library
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- Charitable Giving Charitable giving can reduce your clients’ tax liabilities. However, the general and verification rules for the deduction of charitable gifts must be understood in order to take full tax advantage of such gifts.
Itemized charitable giving would suffer only slightly under the Obama administration’s proposals to reduce the charitable tax deduction for wealthy households and to increase the marginal income tax rates they pay, according to a new study conducted by the Center on Philanthropy at Indiana University.
One proposal would reduce the value of itemized charitable deductions from 35% at present to 28% in 2012 for taxpayers with an adjusted gross income of more than $250,000 for couples or $200,000 for individuals. The other proposal would raise the marginal income tax rate from 35% to 39.6% in 2013 for those taxpayers.
The study, which was sponsored by Campbell & Co., looked at how itemized charitable giving would have been affected in 2009 and 2010 (using historical tax data) if the two proposals had been initiated in those years, respectively.
“Our estimates indicate that if the Administration’s proposals had taken effect in 2009 and 2010, total itemized giving would have declined by 0.4% in the first year and by 1.3% in the second year,” Patrick Rooney, executive director of the Center on Philanthropy, said in a statement.
“This suggests a relatively small direct impact, but combined with the weak economic climate, funding reductions and increased demand for services already affecting some nonprofits and their constituents, these changes are likely to have an additional negative effect in the long term.”
According to the report, total itemized giving would have decreased by an estimated $820 million in the first year and by $2.4 billion in the second year, when both changes were in effect.
The study estimated that itemized giving only from households with $200,000 or more in income would have decreased by 1.6% in 2009 and by 2.4% in 2010.
The study showed that the higher tax rates, which would go into effect in the second year, would have a larger effect on giving than would capping the charitable deduction at 28%.
In 2008, the households affected by the administration’s proposals represented 4.4 million of a total of 144 million individual tax returns filed, or 3% of all tax returns. In 2008, those 4.4 million returns claimed 43.5% of all itemized charitable gift deductions claimed on individual tax returns—a total of $69 billion claimed by high-income households out of a total of $170 billion claimed.
The study’s estimates of the effect of the administration’s proposals were conservative, according to the statement. Other factors, such as when the changes go into effect and how that specific timing influences donors’ behaviors, could also weigh in on the effect of the proposals.
For example, donors might choose to “pre-give” in an earlier year to take advantage of more favorable tax treatments before the changes take effect. Donors’ perceptions of whether the changes are likely to be temporary or permanent might also come into play.