Bush and Senate Draw Up Charity Tax Proposals

Two key developments in Washington this month could help charities that seek donations:

• President Bush has included several tax proposals in his 2004 federal budget aimed at encouraging people to increase their charitable giving. Among them is a plan to allow people who do not itemize on their tax returns to claim a charitable deduction.
• The Senate Finance Committee has passed its own package of tax-law changes called the Charity Aid, Recovery, and Empowerment (Care) Act of 2003, which mirrors many of the provisions in the president’s budget.

In addition to charitable-giving incentives, the proposals, if enacted into law, could also affect how nonprofit groups lobby Congress, as well as how they are regulated by federal and state authorities.

Estate-Tax Repeal

One of the most controversial proposals in President Bush’s tax plan would permanently repeal the estate tax.

Current law reduces the estate tax in coming years, repealing it for one year in 2010. After 2010, without new legislation, the tax would be restored. The Bush administration estimates that extending the repeal of the estate tax and other gift taxes would cost $522-billion over 10 years.

Some nonprofit organizations fear that permanent repeal of the estate tax could cost them a lot of money since the wealthy would lose a big incentive to make donations.

Planned-giving experts say that proposals for new kinds of savings plans in Mr. Bush’s budget could also reduce the tax incentives to donate. Mr. Bush has proposed new savings and retirement accounts. When people withdraw money from the accounts, they would not be taxed on the earnings.

Frank Minton, president of Planned Giving Services, a Seattle company that helps charities establish planned-giving programs, says such a plan could be bad news for some charities.

“If people can shelter the investment earnings on $45,000 a year and retain full control over their money,” Mr. Minton said, “they might be less inclined to set up charitable gifts,” such as deferred gift annuities or certain types of charitable trusts.

Donors, he says, often establish those two types of planned gifts to supplement their retirement savings.

$250 Limit

President Bush and the Senate Finance Committee both seek a key change long sought by many charities: Allow people who do not itemize on their income-tax returns, estimated to be about 70 percent of taxpayers, to write off some of their charitable cash gifts.

Individuals would have to donate more than $250 in a year to qualify for a deduction, and their deduction would be limited to a maximum of $250.

For example, someone who gave $400 to charities could deduct $150.

Mr. Bush wants the change for nonitemizers to be permanent and to take effect retroactively to January 1, 2003; it would cost the Treasury $12.6-billion over 10 years.

The Senate’s Care Act would make the change temporary — allowed only in 2003 and 2004 — and would cost $2.8-billion.

Other key proposals in the two plans include:

Retirement accounts. President Bush and the Senate Finance Committee want to permit people of a certain age to withdraw money from their individual retirement accounts and donate it directly to charity without being subject to income tax.

Mr. Bush would allow people age 65 or older to be eligible; the Senate version would set the eligible age at 70 1/2.

The Care Act would allow people 59 1/2 and older to withdraw money from their IRAs and make donations through planned gifts, such as charitable remainder trusts, without paying tax. The president does not seek any provision for rollovers for planned gifts.

Foundation tax. Mr. Bush wants to lower the maximum excise tax that foundations pay on their net investment income to 1 percent. Foundations, which currently must pay an excise tax of up to 2 percent on their investment income, argue that lower taxes would enable them to give more money to charities.

Travel expenses for volunteers. The Care Act would help some people who use their cars as part of their volunteer work for charities. Under current federal law, volunteers may deduct 14 cents a mile for their automobile costs, or be reimbursed by a charity at that rate without the payment being subject to income tax. The rate for the business use of a car is a much-higher 36 cents a mile.

The Senate bill would exclude from income tax any reimbursements by charities that exceeded the 14-cent charity rate as long as the payments did not exceed the business rate and appropriate records were kept.

Charity lobbying. The Care Act would make a major change in the way that charities count their lobbying expenses (if the organizations have chosen to calculate such costs as a percentage of their budgets). The provision would remove limits on the share of money that groups can spend on “grass-roots lobbying” — efforts to rally popular opinion on legislation.

Charities are now allowed to spend no more than 25 percent of their total lobbying expenses on grass-roots advocacy, while allocating the rest to “direct” lobbying of government officials.

Under the legislation, the percentage limit on grass-roots work would be removed so that charities could make any combination of grass-roots and direct lobbying expenditures, up to an overall amount based on the size of an organization’s budget.

The change would “greatly relieve the substantial record-keeping burden associated with having to keep track of two different lobbying expenditure limits,” said a statement released by Charity Lobbying in the Public Interest, a Washington organization that educates nonprofit groups about lobbying rules and strategies.

Food donations. Both Mr. Bush and the Care Act would allow some companies and individuals to take an increased charitable deduction for certain gifts of food inventory.

Bond-cap repeal. The Bush proposal would allow nonprofit organizations — except for hospitals — to refinance an unlimited amount of taxable debt by repealing a $150-million limit on such refinancings.

New Charity Oversight

The Care Act pairs its provisions to help charities with several measures designed to help federal and state governments improve their ability to regulate nonprofit organizations.

One of the most striking proposals would authorize — though not require — Congress to provide the Internal Revenue Service with $80-million each year to help the tax agency’s financially strapped charity regulators do their work.

The Senate bill would also:

• Allow the IRS to share certain information about charities with state regulators, including notices that the agency is considering revoking a group’s tax exemption.
• Permit and require the revenue service to increase its disclosure to the public of certain documents and rulings concerning nonprofit organizations.
• Require that charities include on their annual informational tax returns all names under which they operate or do business, and the Web addresses of such entities.
• Impose fines on preparers of nonprofit tax returns who omit or misrepresent information (as long as the omissions were not minor, inadvertent mistakes).

Details of the tax provisions in President Bush’s budget plan are available online at http://www.treasury.gov/press/releases/2003239585516578.htm.

Information about the provisions in the Senate’s Care Act may be found on the Web site of Congress’s Joint Committee on Taxation, http://www.house.gov/jct.