U.S. Treasury Softens Stand on Donations : OKs Deduction for Gifts Exceeding 1% of Income, Sources Say

The Reagan Administration, hammered by complaints from churches and colleges, is softening its plan to restrict the tax deduction for charitable contributions, congressional sources said today.

The sources, who spoke on condition of anonymity, said the Treasury Department has agreed on a provision that would allow an itemized deduction for contributions exceeding 1% of income--rather than the 2% floor it proposed last year. The sources said President Reagan eventually may insist that no floor be required--that present law on this provision be retained.

Reagan is expected to make the final decision on the issue shortly after he returns from Europe.

Hundreds of Provisions

The treatment of charitable contributions is only one of hundreds of provisions in the tax-overhaul plan that Reagan will be recommending to Congress by the end of the month. But the issue touches about as many people as any other part of the plan.

The Internal Revenue Service says 54.5 million of the 96.3 million couples and individuals who filed tax returns last year claimed a deduction for charitable giving. Those deductions totaled $38 billion.

The Treasury argued that present law encourages cheating, requires taxpayers to keep extensive records and imposes a big burden on the IRS. “Most individuals would contribute small amounts to charitable organizations without the incentive of an income tax deduction,” the agency added.

Restrictions on Gifts

The original proposal included these restrictions on the gifts deduction:

--Only those exceeding 2% of adjusted gross income could be deducted by taxpayers who itemize deductions.

--The separate deduction for those who do not itemize would be repealed. Present law permits the two-thirds of taxpayers who do not itemize to deduct half their contributions.

--A taxpayer who gives property that has increased in value would be allowed to deduct the fair market value or the original cost, adjusted for inflation, whichever is less. Present law, which the Treasury Department said is too generous, permits all such gifts to be deducted at fair market value.

Cut in Donations Feared

Those changes would boost tax collections by about $7 billion in 1987. But private studies commissioned by organized charities say the changes would reduce contributions by nearly $12 billion a year--a 20% cut.

Even as word of the Treasury Department’s yielding on the 2% floor was reaching Capitol Hill, representatives of organized charities were saying that was not enough.