Give More in 2009 and Avoid Proposed Cap on Itemized Deductions in 2010

Part of the plan of the Obama Administration and the Democratic-controlled Congress in financing their government-run health care program is to cap the benefit of itemized deductions at 28% for taxpayers with adjusted gross income (AGI) over $250,000. Among the various itemized deductions targeted are charitable contributions and mortgage interest expense. This proposal has the potential to adversely affect charitable giving if adopted in the 2010 fiscal year budget.

For example, under the current regulatory structure, a taxpayer in the 35% tax bracket would expect to see a $35.00 benefit for every $100.00 in itemized deductions. However, under the Obama proposal, that taxpayer would only see a tax benefit of $28.00 for every $100.00 in itemized deductions. After you add in the proposed increases in tax marginal rates, the reduction in value can be up to nearly 12% (the spread between the top marginal tax rate and the proposed cap on itemized deductions).

In the tax and spending provisions of its 2010 budget resolution, Congress temporarily side-stepped a vote on this issue, but don’t hold your breath—Congress and the Obama Administration are taking a hard look at these and other revenue sources to finance government-run health care in 2010 and beyond.

Currently, charitable deductions of 30% to 50% of AGI (50% for gifts of cash, 30% for most other gifts, and carry forward for up to five years) are allowed, but under the proposed 28% cap, this benefit may be changing soon. Savvy donors will want to consider increasing their year-end giving for 2009 to take maximum advantage of the current charitable deductions permitted by law, which may not be as favorable in 2010.