Obama Budget Plan Includes Limit on Charitable Deductions

President Obama stuck to his proposal to limit the federal tax breaks wealthy people can get for itemized deductions, including charitable gifts, in his final budget plan released last week.

The president also continues to support the idea of permanently keeping the estate tax at levels that are now in effect.

Peter Orszag, the White House budget director, restated the administration’s defense of its controversial deductions proposal, which seeks to raise money for a reserve fund that will help pay to overhaul the health-care system.

The change, which has drawn fire for its potential to dampen charitable giving, would bring more fairness to the tax system since wealthy people now get bigger tax breaks for their deductions than lower-income people, Mr. Orszag said in a posting on his blog. Furthermore, Mr. Orszag said, the best way to increase donations was to “jump-start the economy and raise incomes,” which the administration seeks to do with the economic-stimulus plan that was enacted in February.

Charity Leaders Split

President Obama has proposed limiting the tax break for itemized deductions to 28 cents for every dollar spent for couples earning more than $250,000 (individuals $200,000), starting in 2011. Under the current system, taxpayers in the highest tax brackets can get the same percentage off as their tax bracket, or up to 35 percent.

The itemized-deduction limits would raise $267-billion, Mr. Orszag said.

The plan has been criticized by many nonprofit leaders and members of Congress, especially Republicans, who say it would harm charities at a time when they are under severe strain because of the economic downturn. Some charity leaders support it, however, because they give high priority to bringing down health-care costs.

Sen. Max Baucus, the Montana Democrat who chairs the Senate Finance Committee and is a key player in the Congressional debate, has said the proposal is still under consideration along with other revenue-producing ideas.

The option came up only briefly during a Finance Committee session last week on how to finance changes to the health-care system. Robert Greenstein, executive director of the Center on Budget and Policy Priorities, a strong advocate of the plan to cap itemized deductions, urged lawmakers to consider altering the proposal rather than rejecting it completely.

They could consider, for example, exempting charitable donations from the caps or limiting the tax breaks at 35 percent instead of 28 percent in 2011, instead of increasing it to 39.6 percent when the top tax bracket rises to that rate under Mr. Obama’s plan.

Exemptions for Heirs

Mr. Obama’s support of a plan to permanently keep the estate tax at levels that are in effect this year is the same approach taken by Congress when it adopted a recent budget outline. The approach is one many charities have been seeking, because they say it will help them appeal to donors.

In 2001, Congress passed the current estate-tax law, which phases out the tax through 2009 and repeals it for 2010.

In 2011, however, the current law is set to expire and estate-tax levels that applied years earlier will go back into effect unless Congress takes action.

Under the current estate-tax law, heirs in 2009 can exempt $3.5-million from taxes ($7-million for couples), with amounts above that taxed at 45 percent.

Grant Williams contributed to this article.