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The charitable deduction wasn’t dumped off the fiscal cliff, but it was dented in the new law passed by Congress. That bill does not include cuts to your charitable tax deduction that are as big as President Obama proposed in his last budget, but it does trim deductibility for donors.

The President and House Minority Leader Nancy Pelosi insisted the new law include the so-called Pease provision, a limitation on deductibility that was abolished under President Bush’s now-expired tax reforms.

As with many tax law details that keep lobbyists’ hourly rates high, the Pease provision is complicated. Here’s an oversimplified summary: Your itemized deductions (including charitable deductions) will be diminished by an amount equal to 3 percent of the income you earn above a certain threshold: $250,000 for persons filing as individuals, $300,000 for married persons filing joint returns.

The most important stat is the swag Congress and the President expect to receive by cutting deductions: $152 billion over a decade.

For more precise details on the Pease provision, consult the best explanation available, courtesy of the Alliance for Charitable Reform (ACR). The Alliance also released this comment:

ACR is pleased that the charitable deduction was preserved in this agreement.  Throughout these negotiations, ACR members and other representatives of the philanthropic community have educated Congress about the value of charitable giving all across our country, especially for those who are in greatest need of services.  The charitable deduction has a direct and indisputable influence on charitable giving, and preserving it has been central to our efforts in Washington.        However, ACR is disappointed that the PEASE provision was made permanent in this agreement, which will progressively limit deductions, including the charitable deduction. We encourage members of Congress and the President to continue to preserve the charitable deduction and revisit PEASE as it relates to charitable giving as we move forward into both tax reform and measures to address the federal deficit.

As ACR’s last paragraph indicates, the charitable deduction’s status remains quite unsettled. Republican and Democrat leaders, including the chairmen of the House Ways and Means Committee and the Senate Finance Committee, all predict much more tax wrangling will soon occur. No one knows what that will mean for charitable deductions.

Resurrecting the Death Tax

Another provision in the fiscal cliff bill that will affect major donors: The estate tax, aka the “death tax,” has been resurrected. It is now permanently set at a rate of 40 percent after the first $10 million, despite the fact that Americans regularly tell pollsters they find such a tax immoral, even if it won’t affect them.

Also of interest to donors are the permanent increases in tax rates for capital gains and dividends: 20 percent for those who earn over $400,000 (as individuals) or $450,000 (as joint married filers).

As I argued previously, seconding Kim Dennis of the Searle Freedom Trust, “economic growth and wealth creation” are vital to the charitable sector’s health, which means punitive taxes will harm charities and wealth creators alike.

Too bad so few in the tax-exempt world ever stop to think about that fact. On the other hand, recall the surprising criticisms of the President’s attacks on the charitable deduction that Emmett Carson made last year. Carson, who is one of the most interesting philanthropic voices on the left, is a past board chair of the Council on Foundations and currently heads the Silicon Valley Community Foundation. He made his criticisms first at a Council on Foundations meeting, then to the New York Times:

We now have a President, a former community organizer, who does not value the charitable deduction. What he’s saying is that, left to its own devices, government can spend those dollars better than philanthropists.

Quoting Carson, I blogged on how odd that particular criticism sounds coming from the left, which is usually oblivious to all the ways that an obese government harms the wellsprings of both private wealth and civic ties.

Others Weigh In

Rick Cohen, another of the left’s most interesting voices in philanthropy, comments on the fiscal cliff bill here. (He doesn’t mind the Pease pilfering of the wealthy, but rightly complains that the middle class and  low-income workers will take a hit because the new law ends the payroll tax “holiday” that has been lowering the “extraordinarily regressive” taxes we pay into Social Security. Now if only Cohen would ponder Social Security a bit more deeply. He might consider how this  pillar of the welfare state not only lives on regressive taxes but also was never designed to help only the poor but rather to enmesh the middle and upper classes into federal redistribution of income, which explains why it (like many government programs) sends so much money to persons who don't need it. And the program also erodes civic ties by encouraging families and communities to think of their older members as the government’s problem.)

Dean Zerbe, once the terror of the tax-exempt sector as a Senate Finance Committee staffer, now sounds different as a columnist for Forbes. On New Year’s day, he blogged:

One of the best things of the Bush tax cuts was the elimination of “PEPS” and “Pease” – shorthand  for phase outs of personal exemptions and certain itemized deductions.  These are in effect hidden marginal rate increases.  Unfortunately, the tax deal brings these bad policies back – albeit at a higher dollar level – hitting folks making $250k single and $300k married.  It all sounds so very boring.  Don’t be bored — this little understood and rarely discussed provision packs a womping tax hit of $152 billion dollars over current 2012 tax policy.

Expect more womping hits as Washington’s insatiable appetites demand ever more from all of our wallets.

FOOTNOTE: For more ugly details on the fiscal cliff bill, see the thorough dissection by the Tax Foundation here.

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