Friday, February 15, 2013

Adios to the Charitable Deduction?

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Recent news reports indicate that Congress is currently considering changes to the charitable deduction aspect of annual income taxes.  The deduction, which has been around for 96 years, is one of several items the Congress and President are considering as the face the challenge of "broadening the tax base".  Bloomberg News reports three possible changes that may occur in regards to the charitable deduction:
  1. cap on amount of allowable itemized deductions;
  2. limiting the tax rate at which the deductions are allowed; or
  3. converting it from a deduction to a credit.
For those who do not itemize, this issue is basically a mute point because the donation and hence deduction is never realized.  This fact escapes many people.  I see it crop up in mortgages too.  People will say "mortgage debt is a good thing because you can deduct the interest".  Well, yes, but only if the interest is more than the standard deduction and you then itemize those deductions.  If you do not itemize, you are not deducting a thing. It sounds great, but has no real world impact.  And as this article points out, only 1/3 of all filers actually itemize their deductions.

Non-profits on the other hand many feel this harshly if the proposal turns to reality.  In 2011, 73% of charitable donations were made by individuals -- not corporations or foundations, actual people.  Would that number decrease if the charitable deduction is limited or removed?  Time will tell. 

How about you?  If you donate to non-profits, would those donations loose appeal if there were no charitable deduction?

Thanks for reading, and I'll be back next week with more thoughts on illness, death and taxes for the middle class.

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