Charitable deductions cap may hurt nonprofits

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The Obama administration’s budget plan asks Congress to raise taxes on the wealthy to help stem the flood of red ink. One of the strategies to increase tax revenue is a cap on the rate that high-income taxpayers can use to claim charitable deductions. This is part of a plan to finance changes to the country’s health-care system. That news is sending shudders through the nonprofit and philanthropic world.

Matthew Bishop, from The Economist and author of "Philanthrocapitalism: How the Rich Can Save the World" says"The budget is clearly relying upon the rich paying more tax than they paid under the Bush administration.  I don’t think, if you actually look at the numbers, that however hard you soak the rich, that it will be enough to make the sums add up.

"I think Obama is interesting in the sense that he both bashes the rich, but also wants to partner with them.  His first job was working for a wealthy philanthropist.  He understands the social innovation that can come out of philanthrocapitalism that I write about in the book.  

"And, he is going to set up a White House Office of Social Innovation that will try and partner with the wealthy and with social entrepreneurs to drive change to government so you don’t get just bigger government, you get smarter government.

"I don’t think you can characterize it either as a pro-rich or anti-rich budget, it’s kind of a new approach and if it could come off it could be quite interesting."

Non-profits are somewhat on the edge, not only because of the economic downturn, but also because of the planned charitable claim deduction cap.  These donations are the domain of people who make more than $250,000 each year. 

Peter Panepento, a web editor with the Chronicle of Philanthropy, says, "What the budget is proposing is that the charitable deduction that wealthy donors can take on charitable donations is going down from a cap of about 33-35% to 28% of their donation.

"So, if someone were to donate $100,000 to charity, instead of getting a $35,000 tax deduction they are getting a $28,000 tax deduction.  There are many folks out there who are worried that that change, on top of all of the other changes, and on top of the economic situation, is really going to affect giving among high-end donors. 

Panepento points out that some thinkers indicate that giving will likely continue unaffected.  The impact may redside at the higher end of the income scale.  "Folks who make $250,000 a year, which is the majority of us, about 98%, are not going to be affected by the change at all.  So, it really is only the top 2% or 3% of all donors, individual donors, would be affected by that change."

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