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Proposal to reduce charitable gift tax deduction, along with weak economy, could increase challenges for nonprofits

The Obama Administration's proposals to reduce the tax deduction high-income taxpayers can take for charitable gifts and to increase the top personal income tax rate, would, by themselves, have a relatively small negative effect on itemized charitable giving, according to information released recently by the Center on Philanthropy at Indiana University.

However, the cumulative effect of those changes and the current economic situation could further increase the challenges nonprofits and their constituents are facing, Center officials said.

Patrick Rooney

Patrick Rooney

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The Center looked at how giving would have been affected in 2006 (the latest year for which itemized deduction data are available) if the Administration's proposals for charitable gift deduction rates and personal income tax rates for taxpayers with income above $250,000 had been in effect at that time.

The Center estimates that the two changes combined would have resulted in a reduction of total itemized giving by the highest income households of 4.8 percent in 2006, or a drop of $3.87 billion in itemized contributions by those households. Total itemized giving by households in the highest income categories in 2006 was $81.26 billion.

"Our estimates suggests that if these proposals had been in place in 2006, total itemized charitable giving by households would have dropped by 2.1 percent," said Patrick M. Rooney, interim executive director of the Center on Philanthropy. "Charities and the public need to understand that in the current economic environment, which is creating difficulty for some nonprofits and their constituents already, this public policy change is likely to have an additional negative effect. However, changes in personal income and wealth, both of which have declined in the past year, have a greater impact on charitable giving than do tax rate changes."

Prior research by Center faculty shows that a 100-point change in the Standard & Poor's 500 Index is associated with a $1.85 billion change in itemized charitable deductions. A $200 billion change in personal income is associated with a change of $4.32 billion in charitable itemized deductions.

The Obama Administration's proposed tax rate changes would affect taxpayers with $250,000 or more in income. In 2006, 2.9 percent of tax returns -- approximately 4 million returns -- had adjusted gross income of $200,000 or more. In 2006, these 4 million returns claimed 43.5 percent of all itemized charitable gift deductions claimed on individual tax returns (a total of $81.26 billion claimed by high-income households out of a total of $186.65 billion claimed). In 2006, these 4 million returns had 31.3 percent of total income on all tax returns.

"Tax incentives do stimulate more giving," Rooney added, "and the challenges facing the nonprofit sector in 2009 suggest that this might be a good time to provide additional incentives, rather than reduce the value of the tax deduction for high income households, so that the donors with the greatest capacity to give have more reasons to do so."

More information is available at .

The Center on Philanthropy at Indiana University is a leading academic center dedicated to increasing the understanding of philanthropy and improving its practice worldwide through research, teaching, training and public affairs programs in philanthropy, fundraising, and management of nonprofit organizations.