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How the Fiscal Cliff Deal Impacts Nonprofits, Donors

01/03/2013 09:26 am ET | Updated Mar 05, 2013

Congress has averted the so-called fiscal cliff for the time being. While the measure avoids one of three federal fiscal deadlines, it has an important impact on donors and employees at nonprofits.

While there were words of celebration from President Barack Obama at the White House, virtually nobody else has said this is a good deal. "I think we all recognize this law is just one step in the broader effort to strengthen our economy and broaden opportunity for everybody," the president said during a late night press briefing. "The fact is the deficit is still too high, and we're still investing too little in the things that we need for the economy to grow as fast as it should."

The legislation deals with revenue and very few spending cuts. Sequestration, the mandatory federal budget cuts scheduled to hit on January 1, was delayed. And, sources told The NonProfit Times that during a conference call with stakeholders Tuesday White House officials would not say that the overall charitable deduction is safe from the being reduced or eliminated in the upcoming budget talks.

What is clear right now is:

* The estate tax will increase to 40 percent from 35 percent on a $5 million threshold. Giving by bequest was up an estimated 12.2 percent, reaching $24.4 billion in 2011, according to the 2012 edition of Giving USA.

* Deductions for wealthy itemizers will be capped. It reduces the amount of itemized deductions by a fixed percentage for each dollar of income (AGI) above a specified amount (up to 80 percent of the total). In this case, it would be 3 percent above the threshold.

"Since it is based on income (not the amount of deductions), it essentially operates as an income tax surtax, not a cap on itemized deductions (i.e., deductions retain the full marginal tax value for most taxpayers)," said Joseph Rosenberg, a research associate at the Urban-Brookings Tax Policy Center in Washington, D.C. The only channel it "can affect the tax incentive on giving is if a taxpayer's disallowed deductions exceed 80 percent of their itemized deductions," he said.

However, the overall charitable deduction is not safe from the being reduced or eliminated in the upcoming budget talks.

* The Payroll Tax Holiday expired. An additional 2 percent tax will be taken from employee paychecks on wages and self-employment income on earnings up to $113,700.

* The so-called Bush-era tax cuts were extended permanently for individuals with income of $400,000 or less and joint filers with incomes of $450,000 or less. The top rate on ordinary income would be 39.6 percent.

"I was always very concerned about leaving the fiscal cliff negotiations in the hands of the 112th Congress. No good policy ever comes from a lame duck Congress," said Neal Denton, senior vice president and chief government affairs officer for the YMCA of the USA. "This deal allows us a bit more time to work with the new Congress and the administration on best approaches to addressing revenues, expenses, policy and social priorities. Nonprofit advocates need to be on their guard. The next several weeks will be important to our sector."

Independent Sector (IS), an umbrella advocacy organization representing nearly 1,000 nonprofits, issued a tepid endorsement of the deal. Via a statement, IS officials said they were happy "the agreement does not provide any direct limitations on the charitable deduction, and that key giving incentives, including the IRA charitable rollover, as well as enhanced deductions for the donation of food and land for conservation purposes have been reinstated and extended through the end of 2013."

The statement also acknowledged the fight is not over. "Additionally, we recognize the agreement reached this week leaves major fiscal and tax policy issues unresolved, and that as discussions resume in Washington about increasing the federal debt limit and addressing the mandatory spending cuts known as sequestration, Congress and the President will once again be looking for additional sources of revenue," according to the IS statement.

The Committee For A Responsible Federal Budget (CRFB), in Washington, D.C., estimated that the package would increase federal deficits by approximately $4.6 trillion over the next 10 years compared to current law projections. But, it would decrease deficits and debt by about $650 billion compared to "more realistic current policy projections," according to the CRFB.

The big argument, according to Irv Katz, president and CEO of the National Human Services Assembly in Washington, D.C., is a lack of direction when it comes to revenue and programs. "Legislators tend to extol the virtues of corporations and business, which tend to build budgets around goals and long-term outcomes (e.g., profitability, market share). The U.S. government lacks goals and long-term outcomes for the citizens and communities of the U.S."

He said, "With goals, expenditures, and cuts, can be made wisely. Without them, there is no telling what the unanticipated consequences will be. Cut education and youth programs and more people will be incarcerated at much greater cost down the line. Cut workforce development programs and many who would become taxpayers remain or become eligible for the earned income tax credit and government assistance programs. Penny wise, pound foolish, or, more like it, short-term wise, long-term irresponsible."

The legislation, according to Katz, "now places the focus clearly on the sequester, where we need voices to help voters and members of Congress to understand" the impacts of cuts. He ticked off a list.

"Non-defense domestic spending is more than entitlements. Entitlements are a misnomer. They are forms of social insurance. Even entitlements are not just for the poor -- they are actually about the middle class, as well. Entitlements are not for 'other people.' They are for our parents, grandparents, members of our families and our work and social circles who are orphaned, disabled, or unable to make a livable wage."

The National Council of Nonprofits expresses mixed views about the passage of the American Taxpayer Relief Act of 2012 (H.R. 8, as amended):

"First, we salute Congress for the strong bipartisan vote in passing a compromise bill to avert certain immediate threats posed by the fiscal cliff. We thank those elected officials and staff members on Capitol Hill and at the White House who worked around the clock to make this compromise possible and for maintaining incentives for charitable giving for most Americans. As negotiations continue on the now-postponed sequestration cuts and on the debt ceiling, we encourage Congress and the President to continue to recognize how essential these incentives are for the work charitable nonprofits perform in every community throughout the country."

Tim Delaney, president and CEO of the National Council of Nonprofits expressed "open frustration and grave concern" at failing to resolve the "pending across-the-board cuts of $54.6 billion from domestic spending programs that will touch virtually every person and every community in America."

He said, "Federal policymakers have failed to recognize that the arbitrary sequestration cuts to domestic programs will reduce funding without reducing the underlying human needs, thereby increasing demands on states, local governments, and nonprofits in local communities while also decreasing resources to provide needed services."

Kicking the sequester can down the road "means kicking those who are already down and struggling to get back up. We, the American people, must keep up the pressure on Congress and the President to stop the punitive and arbitrary cuts and get to work on continuing our economic recovery," said Delaney.

Sources told The NonProfit Times that a conference call was held Tuesday and was chaired from The White House by Valerie Bowman Jarrett, a senior advisor to the president, and Gene B. Sperling, director of the president's National Economic Council. The two briefed on the White House position on the bill, claiming the president got half of what he wanted and the Republicans almost nothing of what they sought.

They admitted though that the charitable deduction, tax reform and sequestration is "still a big conversation to have," according to the sources.