The individual income tax provisions adopted by Congress to avoid the fiscal cliff will boost charitable giving by an estimated $3.3 billion, or 1.3 percent, in 2013, an analysis by the Urban Institute finds.
According to the brief, What Does the Fiscal Cliff Deal Mean for Nonprofits? (5 pages, PDF), the American Taxpayer Relief Act of 2012 will result in increased charitable giving primarily because it raises the top marginal tax rate from 35 percent to 39.6 percent for taxable income above $400,000 for individuals and $450,000 for couples. Taxpayers who itemize deductions can continue to deduct charitable contributions at their full marginal income tax rate, which means donors in the top tax bracket will see their after-tax cost of giving fall from 65 cents on the dollar to 60.4 cents, or by 7 percent. The brief suggests that all $3.3 billion of the estimated increase in charitable giving will come from a 2.5 percent increase in giving by taxpayers in the top income quintile.
Other provisions that may affect charitable giving include an increase in the capital gains tax rate from 15 percent to 20 percent for taxpayers in the top income bracket — a change that increases the tax benefit of donating appreciated property such as corporate stocks, investments, and real estate to charity; and an increase in the top estate tax rate from 35 percent to 40 percent, which may result in a modest decline in the dollar amount of charitable bequests. The reinstatement of the overall limitation on itemized deductions, known as the Pease limitation, is expected to have a negligible effect on giving.