Will the US Fiscal Cliff Hamper Charitable Donations?

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The end of the year is the golden time for charitable contributions. 22% of yearly online donations are made on December 30 and 31, according to the Online giving study. Indeed, the few days leading up to the New Year is the last chance people have to lower their taxes for the year by being generous.

But deducting your charitable contributions from your taxes might be more complicated in 2013. For as the year ends, the U.S. Government is in dire need of finding revenues in order not to topple over the infamous “fiscal cliff”. On Dec. 31, 2012, the expiration for tax cuts and 200 billion dollars in spending cuts will lead to higher taxes (500 billion dollars) and lower spending, which might impact the economy. And playing around with charitable exemptions are some of the options being looked at to avoid that.

Non-profits are lobbying hard so as to make sure that Barack Obama and the U.S. Congress keep tax incentives for philanthropy as they are, while others argue that changes will have no impact on charitable giving. Youphil.com asked Eugene Steuerle, co-director of the Tax Policy Center at the Urban Institute and Brookings Institution, for some clarification.

How is the fiscal cliff going to impact charitable contributions?

We need to backtrack a little in order to understand why charitable contributions are going to be impacted by the fiscal cliff. First we start with the debate over fixing the budget. From there we go to a second debate that is whether fixing the budget should include tax increases or not. Then, that debate goes on to whether we want to include caps and itemized deductions [which help convert taxable income into non taxable income].

The question of charities comes at the end because cap itemized deductions include charitable donations. In a sense, there isn’t a proposal to cut back on charitable contributions per se, but to cut back on the budget, and to cut back on the itemized deduction generally, which includes charitable contributions.

Some people are saying that we might need to exclude charitable contributions from that debate because of the extent to which these contributions would decline. Charitable contributions are the most discretionary of all the items that would be capped. So much more of charitable contributions will receive less because the high income people are the ones who would be affected by the caps.

How much of the charitable contributions would be affected?

Fiscal literature has been ambivalent on the topic. Some people say that for every dollar the government collects, there will be a loss of 50 cents only for charitable contributions. Others say that the per cent that would decline is much greater than that and that for each dollar taken, charities would loose a dollar. I imagine it’s probably in the upper range.

The different proposals on how much is going to be cut down are all over the lot so it’s hard to tell what the actual impact will be. It’s not even sure yet that cuts on charitable donations are going to be included, especially since there is a very substantial lobby against it.

There is no easy solution and the budget people are in quite a box. What is sure is that the biggest impact of cutting out these itemized deductions will not be on the contributor who will have to pay more taxes and who will give less, but on the beneficiary of the charity, the person who goes to the museum or gets a free lunch.

If the government does not find sources of revenues these same people will also be affected by not getting access to services.

Yes, the biggest impact might not be with the tax deductions at all. The hit may even be bigger in the spending issue. The issue for me is that we should be able to figure out the governmental and charitable sides at the same time and not put them up against each other, which is what is being done now.

How do you do that?

The trick would be to reduce the incentive where it’s not effective and increase it where it is. For instance, we know the incentive is not very effective for the first one per cent of giving. We could put up a floor of giving for the first one percent – which wouldn’t reduce the giving - and maybe allow incentives for people who cannot itemize. But that’s only one of the options.

Photo credit: Flickr/striderp64

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