President’s Tax Panel Urges
Incentives for Charitable Giving
All taxpayers could deduct contributions over 1%,
there would be no tax on IRA, sale of property rollovers
The President’s Advisory Panel on Federal Tax Reform has recommended a series of incentives for charitable giving while reducing the opportunity for abuse of deductions in its recently filed report to the President.
The charitable contribution proposals seem to have received relatively little notice in the face of the recommendation to limit home mortgage interest deductions, but the Panel would provide both a carrot and a stick for charities. The major proposals are:
• Allow all taxpayers to deduct contributions over 1% of income. Current law allows only taxpayers who itemize their deductions to claim charitable contribution deductions on their tax returns. The Panel would allow all taxpayers to claim a deduction for contributions exceeding 1% of their income. According to the Joint Committee on Taxation, more than 75% of the deductions were taken by the 12% of taxpayers who had cash income of $100,000 or more in 2004.
• Permit tax-free distributions for IRA rollovers. The Panel recommends allowing taxpayers over 65 to withdraw from traditional Individual Retirement Accounts without paying tax if they make an outright gift of the withdrawal to a charity. Other proposals have urged tax-free withdrawals for transfer to life income vehicles such as charitable remainder trusts, but the Panel did not adopt that view.
• Require charities to report gifts over $600. The Panel would require charities that receive gifts of $600 or more to report those gifts directly to the IRS and to the taxpayer to “improve the accuracy of charitable contributions claimed as deductions.” The IRS currently has no way to verify a claimed charitable deduction short of performing an audit, the report says.
• Allow taxpayers to sell property and donate the proceeds. To grapple with some of the issues relating to valuation of property donated the charities, the Panel would allow a taxpayer to sell property and pay no capital gains tax if the entire proceeds are donated to a charity within 60 days of the sale. “The sale would provide an objective measure of the market value of the property and reduce the charity’s cost and burden of selling the property,” the Panel said. “If donors are better able to get top dollar for their donations, charities will enjoy larger gifts.”
• Improve rules for valuing gifts of property. The Panel recommends new rules requiring clearer standards for appraisals, information reporting by appraisers to the IRS, the donor and the charity, and new penalties for appraisers who misstate the value of the property. It also recommends that “consideration be given to curbing the use of ‘do it yourself’ receipts and inflated valuations for gifts of used clothing and household items”, but does not specify how it would deal with the question. It does not recommend limiting such deductions to $500 a year, as recommended by the Joint Committee on Taxation.
• Ensure better oversight and governance of exempt organizations. The Panel recommends that Congress review standards for qualifying and maintaining charitable status so that the tax exemption, “which is paid for by all Americans, should be extended only to organizations that are truly serving the public interest.” It makes no specific recommendations on this point, however.
YOU NEED TO KNOW
It is interesting to see that the Tax Panel also supports the IRA rollover provision, making near unanimous support for a concept that seems unable ever to be enacted. Allowing the sale of property before a gift and avoiding the capital gain tax if the proceeds are given to a charity is an intriguing idea that would help avoid a whole lot of practical problems for both donors and charities. It would be particularly helpful if it could be applied to gifts to charitable remainder trusts. But don’t hold you breath on any of this.
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