Charitable Giving May Fall Off the Fiscal Cliff

The uncertainty surrounding the fiscal cliff is causing some confusion in the area of charitable giving. Some donors are hurrying to make charitable donations by year’s end to obtain the tax deductions they fear will disappear in 2013, according to Investors Business Daily (IBD), while some are waiting to see what will transpire. It is at least clear that if a donation is made in 2012, the deduction is guaranteed. But fiscal cliff talks include potential caps on itemized tax deductions, including non-profit donations. If there are no cuts to charitable deductions and the top tax bracket rises, which will likely be the case if Congress doesn't act, a wealthy donor's charitable deduction might be worth more next year.

The current rate on gifts and estates is 35 percent. If lawmakers don't make a deal before year-end and the automatic tax increases kick in, that rate rises to 55 percent. With this fear, already the amount of charitable donations is up about 25 percent. This means there will likely be a decrease in charitable giving next year.

Leaders in both parties are searching for revenue to avoid the fiscal cliff. Non-profit organizations are very concerned that deductions for charitable giving will either get slashed or capped. This means that when a Hurricane Sandy-type event happens or an earthquake in Haiti or a tsunami in Thailand, Americans may decrease or stop altogether their usual rush to give cash and assistance.

Bottom line is any drop-off in giving will hurt. Non-profit aid organizations (like Planet Aid) fill a large void that government and private corporations leave. Non-profit groups who have survived the recession with much tighter budgets and fewer contributions due to the recession and the slow economic recovery are increasingly vulnerable.

The charitable deduction is the 9th largest tax expenditure on the federal budget, according to the Congressional Research Service. In 2014, the amount of revenue the government would forgo from those claiming charitable deductions is estimated to reach $52 billion. Can we afford that?