February 5, 2010
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
This text is provided with the understanding that ECFA is not rendering legal, accounting, or other professional advice or service. Professional advice on specific issues should be sought from an accountant, lawyer, or other professional.