More On Tax Planningfrom The Advisor's Professional Library
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- Charitable Giving Charitable giving can reduce your clients’ tax liabilities. However, the general and verification rules for the deduction of charitable gifts must be understood in order to take full tax advantage of such gifts.
The comprehensive tax reform proposal Rep. Dave Camp, R-Mich., introduced in February would make significant changes to charitable contributions.
Camp’s tax overhaul seeks to simplify the U.S. tax code and grow the economy. “The best way to promote charitable giving to the organizations doing so much good in communities across the country is to improve the overall economy, which is precisely what comprehensive tax reform is designed to achieve.”
With regard to charitable giving, it would extend the time individual taxpayers could deduct donations to nonprofits past the close of the tax year to the April 15 filing deadline. It would also eliminate the ability of donors to avoid capital gains on gifts of property.
Whether the proposal has any chance of a House Ways & Means Committee markup this year is an open question.
For one thing, it appears unlikely that any tax reform will take place before November’s midterm elections. For another, reports suggest that Camp’s proposal has run into significant headwinds among Republican colleagues in the House.
Still, Camp’s proposals for charitable deductions offer an insight into the thinking of a key player on Capitol Hill.
One area of charitable giving that would see dramatic simplification is limits on contributions based on adjusted gross income. The AGI limitation currently varies depending on the type of property contributed and the type of exempt group receiving the property.
The Camp proposal would consolidate the 50% limitation for cash donations and the 30% limitation on contributions of capital gain, or appreciated, property to public charities at a single limit of 40%.
In addition, it would harmonize the 30% donation limit for cash contributions and the 20% limit for contributions of capital gain property that apply to organizations that are not covered by the current 50% limitation rule (for example, contributions to private foundations) as a single limit of 25%.
This means that contributions to entities such as private foundations would be permissible to the extent they did not exceed the lesser of either the 25% of AGI or the excess of 40% of AGI for the tax year over the amount of charitable contributions subject to the 25% limitation.
The Camp proposal provides that an individual’s charitable contributions can be deducted only to the extent they exceed 2% of his or her AGI. The reduction would apply to charitable contributions in this order:
- Contributions subject to the 25% of AGI limitations
- Qualified conservation contributions
- Contributions subject to the 40% limitation
An analysis by the Congressional Research Services said that this floor would improve the tax code’s efficiency.
Value of Deductions
Proposed rules for determining the value of a deduction for contributions of property—fair market value or adjusted basis—would be simplified. The amount of any charitable deduction for the most part would be equal to the adjusted basis of the donated property—generally the cost at acquisition.
As a result, the CRS noted, donors would no longer be able to avoid capital gains and receive a tax benefit.
However, for some types of property, the deduction would be based on fair market value less any ordinary gain that would have been realized if the property had been sold by the taxpayer at its fair market value:
- Tangible property related to the donor-exempt group’s purpose
- Any qualified conservation contribution
- Any qualified inventory contribution
- Any qualified research property
- Publicly traded stock
Moreover, the proposal would preserve the current law rule that provides a higher valuation for the charitable deduction for inventory donated solely for the care of the ill, the needy or infants.
Qualified Conservation Contributions
Camp’s proposal would make permanent special, temporary rules for conservation easements, including those that apply to farmers or ranchers.
The general rule would limit deductions for conservation easements to 40% of AGI. Farmers and ranchers would still be able to take a charitable deduction up to 100% of AGI for property used in agricultural or livestock production.
The provision would also clarify that land reasonably expected to be used as a golf course would not qualify as a charitable deduction.
The Camp proposal would repeal a special rule that provides a charitable deduction of 80% of the amount paid for the right to purchase tickets for athletic events.
As well, the proposal would no longer allow income from intellectual property contributed to a charity as an additional contribution by the donor. However, the deduction for the contribution of the intellectual property would be retained.
If Camp’s tax reform proposal became law, it would reduce the rate of taxpayers who itemize to 5%, down from about one-third at present, as the remaining 95% would avail themselves of a larger standard deduction.
The congressman insists that proposed changes to charitable contribution rules would still provide tax incentives for taxpayers who would continue to itemize.
Beyond that, extending the contribution deadline to the due date of the return will boost giving because many taxpayers will decide to be more generous when they are preparing and finalizing their returns.
The Camp proposal says research shows total charitable giving is tied more closely to the overall economy’s health than to specific tax policies that may be in place. It says the proposal, by creating a stronger economy, would increase charitable giving by as much as $2.2 billion a year, based on calculations using data from the Joint Committee on Taxation.
The CRS cast doubt on this claim, noting that the proposal would cut the number of tax filers itemizing, and reduce incentives to giving for middle- and upper-middle-income taxpayers. In addition, the macroeconomic effect of tax reform is uncertain because of possible effects of increasing effective marginal tax rates on economic growth.
For more tax planning stories, check out our Special Report 21 Days of Tax Planning Advice for 2014 home page.