| President Proposes to Cap at 28% the Rate at which High-Income Households Can Itemize Their Deductions |
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Currently the value of a deduction is equal to the deductible amount multiplied by one's top income tax rate, which can range well above 28%. So deductions will be worth less to a high-income tax filer under the president's proposal.
Capping itemized deductions is a proposal he made last year and it went nowhere. That's in part because many in Congress said it would seriously curb charitable giving, even though that is not a foregone conclusion. If the measure gains any traction this year, it's likely Congress would limit the cap to only certain types of deductions, thereby muting its revenue-raising effect.
The White House estimates that capping the rate on deductions could raise $291 billion over 10 years.
In addition to the itemized deduction cap, the President proposed several other “Upper-Income Tax Provisions” for those singles earning over $200,000 and couples earning over $250,000 including:
- Higher marginal rates – The current 33% and 35% rates would be replaced with 36% and 39.6%. For those individuals under the above threshold but currently within the 33% bracket, would get taxed at the 28% level.
- Capital Gains/Dividends Rates – For those individuals over the above threshold, the capital gains and dividends rates would go from 15% to 20%.
- Itemized Deduction/Personal Exemption Limitations – The budget would reinstate the personal exemption phase-out (not clear, but likely a 2 percent reduction of the exemption amount for each $2500 or fraction thereof by which AGI exceeded the threshold) and limitation on itemized deductions (reduction of 3% of amount AGI exceed statutory floors but not more than 80% of allowable deductions) for those over the above income thresholds.
- Estate Tax – The President again called for a permanent extension of the 2009 Estate Tax Levels – a 45% rate and $3.5 million per-spouse exemption. As you know, because Congress did not act on this issue last year, the current estate tax level is 0% and is scheduled to rise to 55% in 2011.
Finally, the President included a $266 million increase for the Corporation for National and Community Service (CNCS), including an increase of $10 million over 2010 for the Social Innovation Fund (SIF), for a total of $1.416 billion for the CNCS. The Obama Administration has touted the Social Innovation Fund as a key part of their support for the nonprofit community, though they have only recently released more of the details regarding the SIF.
Association for Charitable Reform, January 29, 2010
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