Are Charities About to Go Over the Fiscal Cliff Too?

It appears that big businesses may be reading our blog – hey guys! – because they too have apparently been trying to make the most of their charitable giving this year. But even though they’re tripping all over themselves to give their money away, it has nothing to do with kindness. This is all about that imminent fiscal cliff thing. Will the cliff affect the way charitable donations and tax breaks work? And if so, what impact will this have on non-profits?

For almost a hundred years, corporations and individuals have been blessed with tax breaks as a reward for donating to non-profits. There are a variety of stipulations and regulations that come into play, but basically, when a business or individual donates money or assets to charity, their taxable income is reduced. Sounds like a win-win scenario, right? You get a little break and your charity of choice gets a little boost. Unfortunately, the fiscal cliff is forcing lawmakers to ask whether this incentive is now doing more harm than good.

Charitable giving always peaks in December, when the holidays hit and the tax year ends. But donations have been way up this autumn. Philadelphia-based financial advisor Scott Michalek says his clients’ donations have increased in size by 25%. Amy Danforth, head of Fidelity Charitable, reports that donations in the last three months of the year are up 63%. So, what gives? Are corporations and the very wealthy feeling especially possessed by the holiday spirit this year? Hardly. They’re clamoring to milk these tax breaks for all they’re worth, in case they can’t do it next year.

This rush by the 1% to squeeze every last dollar out of charitable-giving tax cuts is one reason why many lawmakers are in favor of eliminating or at least adding more restrictions to the law. Charitable-giving tax cuts, the thinking goes, only really benefit the wealthy, who already pay less in taxes and who don’t actually need a break. According to the Wall Street Journal, households with annual incomes of over $200,000 account for just 3% of tax revenue, but they receive 55% of all charitable-giving tax breaks. It seems that these tax breaks are helping the rich get richer more than they’re helping charities.

While it doesn’t seem likely that charitable-giving tax breaks will be totally eliminated, it does seem likely that the rules governing them will become more strict. Some of the proposed modifications include offering a flat tax credit for donations or capping charitable-giving deductions at 28%. Or what if the Treasury were to match a donation whenever one is made? (That’s another idea.)

Stricter rules may initially seem like bad news for charities in that they could lead to fewer donations, but that actually isn’t the case. According to the Wall Street Journal article cited above, the tax breaks usually don’t have much of an impact at all on giving.

As we teeter on the edge of the fiscal cliff, it’s clear that something has to be done. Eliminating long-standing incentives for charitable giving might, at first glance, seem like a harsh option. But when the incentives have been proven effective only at giving the very wealthy even more of a break, it’s time to re-evaluate.

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