President Obama released his proposed budget for fiscal year 2010 on February 26, 2009. The budget establishes over a 10-year period a reserve fund of more than $630 billion to finance healthcare reform. That might sound like a substantial sum, however, projections indicate that the $630 billion will not be sufficient to fund the healthcare initiative; the government will therefore continue to look for additional resources to subsidize reform.
One of the measures proposed by the President to finance this reserve fund is to reduce the tax benefit associated with certain itemized deductions for taxpayers with incomes over $250,000. Specifically, for these individuals, the Administration’s proposed budget caps the tax benefit of all itemized deductions to 28%. This provision is projected to raise $318 billion over 10 years. The President has also proposed to raise the top two tax brackets to 36% and 39.6%, respectively.
The proposed cap on itemized deductions would affect real estate taxes, mortgage interest deductions, medical expenses and charitable contributions. Of particular concern to the charitable community is the effect that the cutback might have on charitable giving. More specifically, the community is asking whether a reduced charitable contribution deduction and tax benefit for taxpayers in high income brackets will result in decreased annual giving. For those charities whose donor demographics cross all income levels, the impact might not be of great significance. Of particular concern however, is the potential impact on higher education institutions, which often rely on large donations from wealthy donors.
Because charitable giving is not motivated strictly by tax benefits, it is unclear whether the proposal will discourage charitable giving by the wealthy. However, given the impact that the economic downturn has had on investment portfolios and endowments, if enacted, the proposal could introduce more volatility to an organization’s revenue streams. There is serious concern, as well, that the proposal might further depress the housing market, given that the interest deduction would fall for some. Further erosion of the housing market will undoubtedly impact the amount of income available for philanthropic activities.
All the news is not dire. The impact on the nonprofit sector might not be too severe due to a few factors. including the spending provisions of the American Recovery and Reinvestment Act and the fact that many wealthy donors are already restricted to a 28% deduction on charitable contributions under the alternative minimum tax (AMT) structure. (Charitable contributions are deductible for AMT purposes.)
For some not-for-profits, the American Recovery and Reinvestment Act of 2009, passed by Congress this month, provides relief in the way of government subsidies. The majority of the stimulus money will be distributed by states or cities, and nonprofit groups are well advised to explore how to apply for the funding.
Spending provisions that benefit the not-for-profit sector include:
- $2 billion for the Neighborhood Stabilization Program, which helps states and nonprofit groups purchase and rehabilitate foreclosed properties
- $2 billion for Child Care and Development Block Grants
- $1 billion for Community Services Block Grants
- $120 million to provide community-service jobs to low-income older people
- $100 million for the Emergency Food and Shelter Program, an aid program managed by social services charities
- $50 million for the YouthBuild program, which provides money to nonprofit groups to train young people in construction skills
Schneider Downs will continue to monitor and evaluate President Obama’s budget proposal as it makes its way through the legislative process.
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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.