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U.S. Senate Passes Tax Reconciliation Bill Containing Giving Incentives and New Taxes on Certain Contributions

(Nov. 21, 2005) Late last week, the U.S. Senate passed a tax reconciliation act (S. 2020), containing both charitable giving incentives and charity reforms, by a vote of 64-33. Sen. Santorum (R-Pa.), a member of the Senate Finance Committee, successfully offered an amendment in committee that allowed specified charitable giving provisions from the CARE Act (S. 1780) to be included in the tax reconciliation measure. 

In general, the Senate bill appears to be a mixed bag for the sector, containing a number of provisions that appear likely to boost charitable giving. But the major concerns are about misguided provisions that seek to address what Senate Finance Committee Chairman Grassley (R-Iowa) views as widespread abuse throughout the nonprofit sector. In particular, provisions that would impose unprecedented IRS 'processing fees' on certain gifts, essentially levying taxes on charitable contributions, are generating much concern. In addition, the imposition of new record-keeping requirements may significantly chill lower-level donations.

Charitable Giving Incentives

Below is a description of some of the key CARE Act giving incentives that were included in the bill:  

  • Tax-free distributions from individual retirement accounts for charitable purposes. (IRA Rollover provision) -- The provision provides an incentive for individuals over 70 -and one-half-years old to give tax free contributions from their Individual Retirement Accounts for charitable purposes. The bill's language excludes from gross income otherwise taxable distributions from a traditional or a Roth IRA for purposes of a charitable gift. 
  • Deduction for portion of charitable contributions to be allowed to individuals who do not itemize deductions. (Nonitemizer provision) -- In the case of taxpayers who do not itemize deductions, the measure allows a deduction from adjusted gross income for individuals and couples making charitable contributions paid in cash during the taxable year.  However, there are separate floors for claiming the deduction for individuals ($210), and joint returns ($420), as well as new record-keeping and substantiation requirements.
  • Modification of charitable deduction for contributions of food inventories. (Food Donation provision) -- This provision extends and expands another provision in the Katrina Tax Relief bill by allowing any taxpayer engaged in a trade or business, whether or not the taxpayer is a C corporation, to claim the enhanced deduction for donations of food inventory. 

Inclusion of the IRA rollover provision in this bill is a tremendous victory for the charitable sector. This provision should provide a great incentive for donors and will be an effective way of boosting charitable giving to all charities, both large and small.

Many of the provisions have specific individual effective and sunset dates.

Charitable Reforms and New Fees

Several charitable reforms also were included in the bill, including provisions that impose new user fees on donors claiming certain deductions. For charitable contributions of 'certain easements on buildings in registered historic districts,' there is imposed a new $500 IRS filing fee for any contribution that is greater than 3 percent of the fair market value of the building, or $10,000.

The imposition of these fees is unprecedented in the charitable sector and appears to be a thinly veiled attempt to tax the sector--something that upends the concept of 'tax exempt.' AFP is very troubled by these processing fees which could be imposed on other types of gifts in future legislation.

Another area of concern is the section of the bill that modifies substantiation and recordkeeping requirements for certain charitable contributions. In the recordkeeping portion of this provision, no deduction is allowed of any contribution in the form of cash, check, or other monetary gift unless the donor maintains a record in the form of a cancelled check or some form of receipt from the donee. As drafted, this provision would require receipts for things such as giving change to the Salvation Army kettle. AFP is concerned that this requirement is draconian and goes too far by requiring receipts for such small items like loose change. (For non-itemizers, deductions are also limited by the floor on such gifts.)

The bill also would affect deductions for clothing and household items. For instance, the Treasury Secretary will now be required to publish an itemized list of clothing and household items and assign a value to each item. Any deduction for a charitable donation of such items may not exceed their assigned amounts. If the item is not in 'good condition,' the donor would be limited to a deduction equal to 20 percent of the list value. Contributions for which the taxpayer gets an appraisal are not subject to the proposal. For contributions of clothing or household items with a claimed value of more than $500, the taxpayer may elect to use the amount received by the charity from the sale of the item rather than the list value. 

The measure contains a myriad of additional provisions addressing reforms for donor advised funds, supporting organizations, information sharing by state and federal officials, increased penalties, annual notices from small (under $25,000 annual revenue) organizations and many other items. A summary of the Senate legislation is available at: http://finance.senate.gov/sitepages/leg/111805legbill.pdf

Senate Awaits House Action

The Senate is now awaiting action in the House where a separate version of the legislation is pending. The House will not vote on its version of the bill until it returns following the Thanksgiving holiday. AFP is actively engaged in efforts to improve the House companion measure.

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