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.