With the push for tax reform in the national spotlight, tax deductions of all kinds are on the chopping block, among them the income tax deduction for charitable donations. This New York Times blog speculates on the future of the charitable deduction and discusses its effect on charitable giving.
The Obama administration is pushing to limit the value of charitable deductions for high-income taxpayers to 28%. Under this proposal, the amount of your charitable deduction would be limited if you are subject to a marginal tax rate higher than 28%. For example, suppose you donate $10,000 to charity and you fall into the 39.6% marginal income tax bracket. Currently, your donation would offset your income dollar for dollar, such that you would pay no tax on the amount of your income that was donated, resulting in a $3,960 reduction in your tax bill. Under the proposed rule, your tax savings from the donation would be worth only $2,800. It is unknown whether this proposal will be enacted in the near future; however, lawmakers are hard-pressed to come up with additional tax revenue in the current fiscal climate.
What does all this talk about the charitable deduction mean for you? Tax reform is likely to make the charitable deduction rules less generous to taxpayers in the future. If you are contemplating a substantial gift in the near future, it may be a good idea to make the gift this year before any changes take place. Better yet, consult with a tax advisor who can help you structure your finances in a way that minimizes your taxes.