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Panel on Tax Reform Delivers Final Report: Charitable Incentives Retained
The President's Advisory Panel on Federal Tax Reform yesterday presented its final report in which it made sweeping recommendations to overhaul the federal income tax system for individuals and corporations. The bipartisan panel offered six recommendations to strengthen incentives for charitable giving and improve tax administration.
The President's Advisory Panel on Federal Tax Reform yesterday presented its final report in which it made sweeping recommendations to overhaul the federal income tax system for individuals and corporations via the recommendation of two options -- The Simplified Income Tax Plan and The Growth and Investment Tax Plan.
Of the report's 307 pages, four were dedicated to "Improving Benefits for Charitable Giving." The bipartisan panel offered six recommendations that in its own words are intended to "strengthen incentives for charitable giving and improve tax administration":
The full text of the report is available at http://www.taxreformpanel.gov/final-report/
Charitable Provisions from Panel Report:
To strengthen incentives for charitable giving and to improve tax administration, the Panel recommends a number of changes to simplify the deduction for charitable contributions and make charitable incentives available to more taxpayers, while reducing opportunities for abuse of the deduction.
Providing Better Incentives to Give to Charity
The current-law deduction for charitable contributions provides an incentive for taxpayers who itemize to give to charity, providing an important source of funding for charitable organizations that serve the public good. Because the deduction for charitable contributions is limited to taxpayers who itemize deductions, its benefits are not shared equally by all taxpayers. According to the Joint Committee on Taxation, more than three-fourths of the estimated tax expenditure for the charitable contribution deduction went to the 12 percent of taxpayers who had cash income of $100,000 or more in 2004.
Americans by their nature are generous and have always supported charitable causes -- not only as a regular routine of giving back to the community, but also in response to times of great need or natural disasters. This support is likely to continue, even if changes in law affect the tax benefits of giving. Research has shown, however, that taxpayers are sensitive to the tax rules on charitable giving. Because of the importance of these incentives and the fact that they are not currently enjoyed by most lower and middle-income households, the Panel recommends retaining a tax benefit for charitable deductions, but making it available to all taxpayers who give to charity, not just to taxpayers who itemize. The Panel also recommends that the tax benefit be structured as a deduction to provide incremental incentives to higher-income donors, an important source of charitable donations.
- Create a deduction for charitable contributions that exceed one percent of income. The deduction would be available to all taxpayers.
The Panel recommends that all taxpayers be entitled to deduct charitable contributions exceeding 1 percent of income. This level is based on the observation that most taxpayers already contribute more than 1 percent of their income to charity. In 2003, approximately 74 percent of individual taxpayers who claimed a deduction for charitable giving contributed more than 1 percent of current-law adjusted gross income. Using a fixed percentage of income as the threshold for the deduction would ensure a uniform incentive to contribute, regardless of income.
The Panel's recommendation also would reduce the recordkeeping burden and the potential for cheating on small deductions, which are not cost-effective for the IRS to verify. Taxpayers who give less than 1 percent of their income would not need to keep any records.
- Allow tax-free distributions from IRAs to be made directly to qualified charitable organizations.
The Panel also recommends allowing taxpayers over age 65 to make tax-free gifts from their traditional IRAs directly to qualified charities. Under current law, a taxpayer who donates assets from an IRA to a charity must include the amounts in income and separately claim a charitable deduction. This treatment may discourage some taxpayers from contributing their IRA assets to charity because they may not be able to claim a charitable deduction for the entire amount. This is especially true if the taxpayer does not itemize deductions or is subject to limitations that cap the amount of the deduction to a percentage of income.
Improving Recordkeeping for Charitable Gifts
- Require information reporting for large charitable contributions.
The IRS currently has no way to verify a claimed charitable deduction, short of performing an audit. To improve the accuracy of charitable contributions claimed as deductions, the Panel recommends that charities be required to report large gifts directly to the IRS and to the taxpayer, thereby assisting taxpayers in claiming correct amounts and allowing the IRS to verify deductions.
To minimize the burden on charities who accept small donations, the Panel recommends the reporting threshold be set at $600 or higher. Additional information about the Panel's recommendation for information reporting for charitable deductions can be found in the Appendix.
Reducing Controversy and Uncertainty in Valuing Gifts of Property
Under current law, taxpayers are entitled to deduct the full fair market value of gifts of some types of property. Determining the value of donated goods can be difficult because it is so fact-intensive. Valuation is especially difficult for unique property that does not have an established market value. In addition, the IRS does not have a cost-effective way to verify the value of donated property. This provides an opportunity for some taxpayers to overstate the value and inflate the amount of the tax deduction claimed. In recent years, a number of abuses involving contributions of used automobiles or partial interests in real estate have come to light. These transactions relied on inflated valuations. In some cases, middlemen and brokers used by charities to sell donated property received more benefit than the charities themselves.
The Panel recognizes that current-law rules for donations of noncash property provide an added incentive for taxpayers to give to charity and, therefore, recommends that current-law rules be retained. However, the Panel recommends that current rules for valuing donated property be tightened and made more explicit to prevent abuses.
- Allow taxpayers to sell property and donate the proceeds to charity.
The Panel recommends that taxpayers be allowed to sell property without recognizing gain and receive a full charitable deduction if the entire sales proceeds are donated to a charity within 60 days of the sale. This rule would apply to the same extent that the property would be eligible for a charitable contribution deduction equal to fair market value under current law (other than items of personal property that are eligible because they are related to the charity's purpose or function). The donor of the proceeds would not be required to pay capital gains taxes on the appreciation of the property. The charitable contribution deduction would be available to the extent that the donor's total contributions exceed the 1 percent of income threshold. To be eligible, the sale of property would need to be an arm's-length sale to an unrelated party.
This proposal would remove an impediment under current law to selling appreciated property and donating cash proceeds, which are more useful to charities. The sale would provide an objective measure of the market value of the property and reduce the charity's cost and the burden of selling the property. If donors are better able to get top dollar for their donations, charities will enjoy larger gifts.
- Improve rules for valuing gifts of property to charities.
In cases where property is donated to charities, the Panel believes that it is necessary to implement better standards for appraisals. The Panel recommends (1) new rules requiring clearer standards for appraisals; (2) information reporting by appraisers to the IRS, the donor, and the charity of the appraised value of property; and (3) new penalties for appraisers who misstate the value of property. Additional information regarding the Panel's recommendations for appraisal standards can be found in the Appendix.
The Panel is also concerned that the current rules for contributions of used clothing and household items create the potential for overvaluation and cheating on small deductions. The current system of self-reporting has led to the use of "do it yourself" receipts and third-party valuation guidelines that sometimes provide overly generous values. The Panel suggests that consideration be given to curbing the use of "do it yourself" receipts and inflated valuations by allowing deductions only when the taxpayer receives a price list and an itemized receipt from the charity.
Better Oversight of Exempt Organizations
- Effective action should be taken to ensure better oversight and governance of exempt organizations.
The Panel believes that it would be appropriate and desirable for lawmakers to review the types of organizations that qualify for tax-exempt status. A tax exemption, which is paid for by all Americans, should be extended only to organizations that are truly serving the public interest. The Panel recommends that Congress review the standards for qualifying and maintaining status as a charitable organization. Although the Panel does not make specific recommendations for changes to rules governing exempt organizations, the Panel recommends that effective action be taken to ensure greater oversight and better governance of exempt organizations.