The new law increases the top income tax rate from 35 percent to 39.6 percent on taxable income above $400,000 for individuals and $450,000 for married couples. It also increases the top tax rate on long-term capital gains for taxpayers with incomes above those thresholds.
Both provisions increase incentives for people to make charitable donations, according to the analysis of the law by the Urban Institute Center on Nonprofits and Philanthropy.
For example, if a married couple has a top income tax rate of 35 percent, a $1 deduction will lower their tax bill by 35 cents. If that same couple has a top tax rate of 39.6 percent, a $1 deduction will lower their tax bill by nearly 40 cents, making the deduction more valuable.
Similarly, the higher tax rate on capital gains increases the incentive to donate securities to charity as a way to avoid those taxes, said Eugene Steuerle, a fellow at the Urban Institute who worked on the analysis.
The Pease limitation, meanwhile, should have a negligible impact on charitable giving because it is based on income, not on the amount of deductions, Steuerle said.
Nevertheless, nonprofits and charities are wary of any provision that could limit the charitable deduction.
“We just know that this change is definitely not going to be helpful,” said Gloria Johnson-Cusack, executive director of Leadership 18, an alliance of CEOs of charities, non-profits, and faith-based organizations. “We don't think now is the time to be experimenting with a policy that has the potential” to reduce the incentive to donate.
Charitable organizations fear that even more tax changes could be coming as momentum builds in Congress to overhaul the tax code, to make it simpler and more transparent. So far, lawmakers have been wary of publicly targeting any tax break for elimination, to avoid generating opposition before the process gets started.
Still, interests groups of every stripe already are lobbying Congress to protect cherished tax breaks.
Leadership 18 is part of the Charitable Giving Coalition, a broad group of nonprofit organizations dedicated to preserving tax incentives for charitable giving.
“We are trying figure out the best way to address any kind of changes that they may be talking about that would act as a disincentive,” Johnson-Cusack said. “We're real worried about it.”
Taxes can play a role in how much people donate to charity, but other factors play a larger role, said Patrick Rooney, associate dean of the Indiana University School of Philanthropy.
“When you ask why people why they are donating, taxes are fairly far down on the list,” Rooney said. “The key motivations are really to do things like feed the hungry and house the homeless and to support one's religious organization or to improve the quality of one's alma mater.”
“The single biggest factor that would change giving is an improvement in the overall economy,” Rooney said.