Charities worry about tax deduction cuts
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Any change to the tax law will rebalance the equations that influence how big a check donors write and what programs charities offer.
Charities worry that if proposals to lower or eliminate the charitable donation deduction are enacted, big donors will give less in the future.
And accountants are advising their high-net-worth clients to give more this year -- while the current deduction rules are still certain.
"For someone who constantly gives year after year and gives approximately the same amount, if they have the wherewithal to double up or triple up on their contributions . . . we're suggesting they do it this year," said Carolyn Mazzenga, partner at the Melville office of accounting firm Marcum Llp.
In general, when a person gives money to a charitable organization and receives nothing in return, that amount of money can be subtracted from adjusted gross income, which in turn lowers the taxes owed. Tax law already caps the deduction at 50 percent of adjusted gross income.
Accountants said any changes that reduce the tax deduction on donations would hit high-earning donors -- households earning more than $250,000 a year, whose taxes could go up next year as part of a deal to avoid the "fiscal cliff."
The fiscal cliff is a package of automatic tax hikes and spending cuts that will go into effect early next year if Congress and Obama don't reach an agreement to reduce the budget deficit. Any agreement is likely to include a mix of targeted spending cuts and tax hikes -- and possibly a cap on income tax deductions.
Obama has proposed, for filers earning $250,000 a year or more, a cap on deductions -- which include charitable donations as well as state and local taxes and home mortgage interest, among other things -- at 28 percent of adjusted gross income.
Moreover, even a deal on the fiscal cliff that doesn't touch charitable donations now won't end the pressure to raise tax revenue by ending the deduction in the future. A cliff deal won't end future budget deficits, or the pressure to close them.
Internal Revenue Service data show that people who make the most money are also the ones who give the most. Long Islanders gave $2.29 billion to charities in 2008, 18.3 percent of the $12.5 billion New Yorkers gave, according to the latest available -- and still preliminary -- IRS data. Nearly three-quarters of charitable giving on Long Island comes from its higher-income households. IRS data show that in 2008, 70.4 percent of charitable deductions -- $1.61 billion -- came from filers with adjusted gross incomes of $100,000 or more. Wealthier filers within that group, with adjusted incomes of $200,000 or more, accounted for 42.5 percent.
If the deduction is reduced or eliminated, organizations may have to adjust their budgets to deal with lower donations, said Suzanne LeBlanc, president of the Long Island Children's Museum in Garden City.
"It's not that [donors] wouldn't give at all, it's that they might reduce their giving," LeBlanc said.
Scott O'Sullivan, an accountant at Margolin, Winer & Evens Llp in Garden City, has told clients that they're probably better off making large contributions before the end of the year.
"If somebody's on the fence and making a $100,000 charitable contribution in December or January, I'm recommending they take it in 2012 where they absolutely know they can get the tax deduction associated with that," he said.
To be sure, O'Sullivan is also telling clients to wait out negotiations a little bit longer to see what deal may result if Congress and the president reach an agreement.
"If someone says to me, 'Listen, I want to make that deduction right now because I'm going away,' I'm going to tell them, 'Listen, keep your checkbook with you, and we may need to make this payment on Dec. 31 or Dec. 30 to make sure that we get that deduction in the right year,' " O'Sullivan said.
That people are monitoring tax laws to time their donations proves how important the tax deduction is, said Diana Aviv, president and chief executive of Independent Sector, a group that represents nonprofits. Last week, Aviv argued in an opinion piece in The Wall Street Journal that the deduction is a "crucial incentive" that gets people to give who otherwise might not and to increase the size of gifts.
The possibility that large donors might curtail gifts if the federal government offered less of a subsidy has mobilized lobbying efforts among both charitable organizations and donors with a common message, Aviv said. "Don't visit pain on these organizations, because it's not the rich that will suffer, it's the organizations and, more importantly, the people they serve who will suffer," she said.
Charitable organizations are skittish about publicly wading into the tax debate. Aviv said she's heard recently from member organizations that large donors have gotten angry at charities that have done so.
Several Long Island charities said they haven't noticed a big end-of-the-year surge in giving that they would attribute to concern over the tax code, and where there has been an uptick it could easily be a charitable response to superstorm Sandy. United Way of Long Island, for example, reports donations are up 6 percent compared to a year ago, but it attributes some of that to the storm.
The prospect of change has raised alarms nonetheless.
Matthew Campo, executive director of Ronald McDonald House of Long Island, the New Hyde Park branch of the national charity that provides housing for families of children undergoing treatment at hospitals, said people give for other reasons than the tax code. "They do get the deductions and that's wonderful, but the projects that they fund help the community."
However, a large donor who decides to fund something like the new wing of a hospital may still want the deduction, he said. Campo said he hopes the current system will remain in place "unless the government is prepared to step in and take over some of these projects themselves."
Theresa Regnante, president and CEO of United Way of Long Island, in Deer Park, said the tax deduction particularly helps donors below the very top tier.
"For the wealthiest of the wealthy who really are very philanthropic I think it has very little consequence . . . they're already giving over what you can clearly deduct," Regnante said. But for people in the middle, whose annual gifts are in the low- to mid-five figure range, it makes a difference, she said.
"We are very concerned, as the United Way [raises] most of the money through private individuals, that this would have a devastating effect on the $5.1 billion that the United Way raises as an institution across the country," she said. United Way runs education, anti-poverty and health programs using volunteers and by providing grants to local service providers. The Long Island chapter raised $9.3 million from charitable gifts in its last fiscal year. Those gifts, combined with government contracts, paid for $15.5 million of services.
The charities' concerns jibe with accountant O'Sullivan's assessment.
"For the overriding majority there's a charitable intent and goodwill associated with the charity . . . but the tax deduction sweetens the pot," O'Sullivan said. Moreover, "There are people who won't make a charitable donation but for the tax deduction."