Senate Democrats' Latest Budget Proposal Includes Limits on Charitable Deduction

The latest budget plan proposed by Senate Democrats calls for new limits on how much wealthy taxpayers can deduct on their tax returns, including those taken for charitable donations, the Chronicle of Philanthropy reports.

The proposal lays out several approaches to limiting or capping itemized deductions, including those for mortgage interest and state and local taxes. While the Obama administration favors an approach that would reduce the value of any itemized deduction, including the one for charitable giving, from 39.6 percent to 28 percent, the Democrats' plan does not specifically endorse the 28 percent rate. Another approach would cap the total dollar amount that an individual or couple could deduct — an idea Republican presidential nominee Mitt Romney endorsed during the 2012 campaign. According to the Chronicle, charities fear that option the most because it could lead to situations in which wealthy taxpayers max out the cap with their mortgage interest and state and local tax deductions, thereby eliminating the tax benefit of making a gift to charity. Another option, first floated in 2010 by the National Commission on Fiscal Responsibility and Reform — also known as the Simpson-Bowles Commission — would replace the charitable deduction with a 12 percent tax credit applied to amounts above 2 percent of a taxpayer's adjusted gross income.

The plan also includes a proposal to impose a cap of 2 percent of adjusted gross income on the tax benefits derived from all deductions except the charitable deduction — an idea supported by Martin Feldstein, a Harvard University economist. "This cap should be applied to all deductions except the one for charitable contributions," Feldstein said last week in an op-ed in the Washington Post. "The full deduction for charitable contributions should be retained, because the money that taxpayers give to charity benefits those organizations rather than the individual taxpayer."

Martin Feldstein. "It's Time to Cap Tax Deductions." Washington Post 03/13/2013. Doug Donovan. "Senate Democrats Call for Limits on Charitable Deductions." Chronicle of Philanthropy 03/15/2013.