Senate’s Effort to Change Charity Tax Breaks Provokes Controversy

Congress has moved a step closer to passing a comprehensive tax bill with provisions — long sought by many nonprofit organizations — that are designed to encourage charitable giving and to cut down on abuses of charity tax laws.

But the measure, which was passed by the U.S. Senate, worries some nonprofit leaders who fear that a key provision could put a damper on giving by Americans with modest incomes who itemize on their tax returns.

The House of Representatives has been working on its own tax bill and may pass a version that does not include any provisions affecting charities or donors.

A conference committee of both chambers would work out the differences between the Senate and House bills and decide whether — and what — charity provisions should be included in a final version.

Limits on Write-Offs

The Senate legislation’s chief method to spur donations would allow people who do not itemize deductions on their tax returns — about 74 percent of Americans — to write off a portion of their charitable donations. Individuals could deduct the sums above $210 that they donate each year to nonprofit organizations; couples filing jointly could write off the amount that exceeds $420.

The provision would be in effect for two years — 2006 and 2007 — unless Congress votes to extend it, and would cost the Treasury an estimated $2-million.

But while donors who do not itemize would gain an ability to get a tax break, another provision in the bill would cause some people to lose part of their write-offs. Donors who itemize deductions would no longer be able to claim deductions for cash and noncash gifts of $210 or less — $420 for couples filing jointly — but only for gifts above that figure.

“We are concerned that this new ‘itemized’ floor might adversely affect charities that depend on small gifts,” including organizations that use mail and telephone appeals to reach donors with modest incomes, said Senny Boone, executive director of the Direct Marketing Association Nonprofit Federation. “It could hit smaller donors hard,” she said. “Those who can only afford to give $500 to $800 would only be able to deduct one half of their contributions, or less.”

But others applaud the Senate for acting to help people who don’t itemize on their returns get a break, even if some donors must cope with a limited deduction as part of the deal.

The United Way of America, a leading proponent of a deduction for people who do not itemize, estimates that a $210 floor for all taxpayers would increase annual charitable giving to United Ways by more than $100-million and to all nonprofit organizations by more than $1-billion.

“We are absolutely concerned about itemizers losing part or in some cases all of their charitable deductions,” said Patrick Lester, policy director at United Way of America. “But we want to see the current provision in the Senate bill enacted into law. Then we would come back in the future and work to lower the floor or eliminate it.”

Diana Aviv, president of Independent Sector, a Washington coalition of 600 nonprofit groups and foundations that has long supported extension of the charitable deduction to people who don’t itemize, said her organization would have preferred that the Senate “not touch those who itemize” and possibly depress some charitable giving.

But, Ms. Aviv said, many people who itemize on their returns might not be so affected by the legislation’s limits.

“We have always worked from the assumption that people give because they want to give, but they give more with an incentive,” she said. “So it would remain to be seen whether in fact those who are concerned are correct.”

Gifts From Artists

Another provision in the Senate bill would try to stimulate charitable giving by allowing older people to withdraw money from their individual retirement accounts and donate the sums to charity tax-free, a provision that charity fund raisers say could provide significant contributions to their organizations.

The bill also would — under certain conditions — allow people to donate their own literary, musical, artistic, or scholarly compositions while claiming tax deductions at the fair market value of the work rather than at the cost of producing the work, as required under current law.

Several provisions in the Senate bill are aimed at cutting down on what senators say are abuses of charity tax laws.

To deal with concerns that many donors are taking overly generous tax deductions for gifts of clothes, household items, and other noncash goods, one section of the measure directs the Internal Revenue Service to publish a list of such items and assign a value to each one.

People would not be allowed to take a deduction for an item that was higher than the value listed, unless they got an independent appraisal showing the value of the item donated.

For a description of all the provisions in the Senate bill, known as the Tax Relief Act of 2005, go to the Web site of the Senate Finance Committee, http://finance.senate.gov.