CBO Study Examines Options for Charitable Giving and Tax Consequences

May 27, 2011

Congress and the Obama administration are looking closely at options to revise or replace the current charitable deduction. See McGuireWoods LLP news alert “Is Congress Tipping Its Hand on the Future of Charities and Charitable Deductions?

At the request of the House Committee on the Budget, the Congressional Budget Office (CBO) conducted a study of charitable giving and an analysis of the various proposed options for changing the current federal income tax treatment of charitable giving. The CBO released the results of its study, Options for Changing the Tax Treatment of Charitable Giving, on May 24, 2011. The full study can be found on the CBO’s website.

Members of Congress appear to be interested in modifications to the charitable deduction and have made various proposals to replace or reform the deduction to reduce the cost of foregone revenues to the government. Some proposals would impose a floor that the charitable donations would need to exceed to qualify for the deduction, while others would replace the deduction with a nonrefundable tax credit.

The CBO study examines different categories of options to change the current treatment of charitable giving and the possible effects on the level of donations, the costs to the federal government, and the distribution of tax benefits by income group. The options include (1) retaining the deduction for taxpayers who itemize but adding a floor, (2) allowing all taxpayers to claim the deduction, with and without a floor, and (3) replacing the deduction with a nonrefundable credit for all taxpayers, with and without a floor. The CBO analyzed the credit option at levels of 25% and 15% of a taxpayer’s charitable donations, and options for the potential floor at a fixed dollar amount and a percentage of adjusted gross income.

Adding a floor to any of the options would both increase the government’s revenues and reduce the total amount donated to charity, compared to the options without a floor, the CBO concluded. For each case with a floor, however, the reduction in charitable donations would be less than the increase in government revenues. Adding a floor to the current deduction would reduce the tax subsidy for all income groups that itemize, and a percentage floor would create a greater reduction for high-income taxpayers than a fixed dollar floor.

The CBO study found that allowing all taxpayers to claim the charitable deduction with a floor, as well as replacing the deduction with a 25% tax credit, could increase charitable contributions and increase government revenues. The credit option would provide a greater benefit to lower- and middle-income taxpayers, but would decrease the tax subsidy for taxpayers with adjusted gross income greater than $100,000.

The CBO study does not account for ways in which taxpayers might alter their giving behavior in response to changes in the deduction and, in keeping with its mandate to provide impartial analysis, gives no recommendations on the various options. Nevertheless, these results may affect the future of charitable giving. Charities should take note that any change affecting the level of donations could equate to substantial repercussions for charitable organizations because approximately 75% of charitable contributions come from individual donors.

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