WASHINGTON – Churches, religious organizations and other nonprofits – and their donors – avoided the worst of the proposed restrictions on charitable deductions in the “fiscal cliff” legislation signed Jan. 2 by President Obama, but they did not escape fully unscathed.
The new law does not include a flat percentage cap on charitable giving, but it does reinstitute a limitation on itemized deductions for higher-income Americans. Congress approved, and the president quickly signed, the bill to avoid the expiration of tax cuts for most Americans, as well as automatic reductions of $55 billion each to defense and non-defense spending.
The measure includes what is known as the Pease limitation, which affects individuals with incomes of at least $250,000 and married couples filing taxes jointly with incomes of $300,000 or more. The limit reduces charitable and other itemized deductions by three percent of the amount by which adjusted gross income surpasses those thresholds.
Religious and nonprofit organizations expressed disappointment the Pease limitation was reinstated but seemed relieved that more severe restrictions were avoided. Leaders in both political parties had suggested further restrictions on charitable deductions.
Those proposals “could have cost charities billions of dollars in contributions,” said the Evangelical Council for Financial Accountability (ECFA) in a written statement.
The law not only reinstated the Pease limitation but made it permanent beginning in 2013 “to the disappointment of many in the charitable sector,” ECFA said.
The Independent Sector – a coalition of about 600 charities, foundations and corporate philanthropy programs – was glad no flat percentage restriction was approved. Its president expressed anxiety, however, about how the Pease limit, in conjunction with the new law’s increased taxes on higher-income Americans, would affect giving.
“We are concerned,” Diana Aviv said, according to The Wall Street Journal. “The big question for us now is, if we are [also] increasing rates on folks … does the combination create a greater disincentive for people to give?”
Both organizations expressed gratitude the new law extends for a year an individual retirement account (IRA) rollover provision that enables seniors at least six months beyond their 70th birthday to donate as much as $100,000 from their IRAs to nonprofits without paying income tax on the contribution.
ECFA and Independent Sector acknowledged, however, they expect charitable deductions to be a topic of consideration as Congress debates the debit ceiling.
In November, Southern Baptist church-state expert Richard Land warned the more restrictive recommendations to cap charitable deductions seriously threatened religious organizations.
“This would be catastrophic in its impact, particularly on those large gifts that many religious organizations, colleges, universities and ministries, as well as churches, depend upon for continuing operations,” said Land, president of the Ethics & Religious Liberty Commission. “Everything we know from past experience tells us if they cap deductions it will seriously erode charitable giving.”
Enacting such limitations would not only reduce giving to churches and charities but would harm services such organizations provide to the needy, said Land and other foes of capping such deductions.
In his budgets, Obama has proposed capping the itemized deduction at 28 percent for couples whose incomes are at least $250,000 and individuals who make at least $200,000 a year. High-income earners now can deduct at least 33 percent in charitable gifts.
The Pease limitation is named for its prime congressional promoter, Rep. Donald Pease, D.-Ohio. Pease served in the House of Representatives from 1977 to 1993. Congress enacted the limit in 1990 but rescinded it gradually beginning in 2001. Its repeal was complete in 2010.