News and analysis
January 16, 2014

Charitable Deduction Probably Safe for 2014, Say Experts

Nonprofit experts are confident the charitable tax deduction will emerge unscathed from the current session of Congress, but they are less certain how lawmakers will deal with several tax breaks for charities that expired at the end of 2013.

President Obama has long pressed to limit the tax savings wealthy people can get for itemized deductions, including for charitable gifts, and he will likely reprise such an approach in his proposed budget next month. Solitary changes in tax policy, however, stand little chance of success unless they are cobbled together with other tax items. Putting together a large tax bill, budget experts say, will be difficult before the midterm elections in November.

A New Chairman

A forthcoming leadership switch in Congress could make any changes in the charitable tax deduction even more remote.

Sen. Max Baucus, Democrat of Montana and chairman of the Senate Finance Committee, which writes tax bills, will leave Washington to serve as ambassador to China pending expected approval by the Senate. His likely replacement, Sen. Ron Wyden, Democrat of Oregon, is a vocal supporter of the charitable deduction.

Many observers predict Mr. Wyden will work at a more measured pace than Mr. Baucus, who was eager to pass a broad tax overhaul before his planned retirement from Congress at the end of the year.

“There’s zero percent chance any significant tax reform will happen this year,” says Andrew Schulz, executive vice president of Foundation Source, a group that advises private foundations.

Others agree.

“I don’t see it happening,” says Candy Hill, who leads public-policy advocacy at Catholic Charities USA.

The long odds of a tax overhaul have prompted Catholic Charities to focus on pressing for increases in federal anti-poverty spending while it remains in a “monitoring position” on the charitable deduction, Ms. Hill says.

Similarly, when more than 1,000 United Way leaders gather in Washington in May for their annual conference, they will be “vigilant” in discussions with lawmakers about maintaining the deduction if the issue is up for consideration, says Steve Taylor, senior vice president for public policy at United Way Worldwide. But he says a host of other nontax items—including spending levels for Head Start, K-12 education, and federal job training—will top the groups’ Washington agenda.

IRA Rollovers

The same factors that will likely protect the charitable tax deduction will make it difficult for nonprofits to see action on other tax priorities.

One of those is a set of about 55 temporary tax benefits, including several that benefit nonprofits, that expired at the end of 2013. Congress has regularly passed legislation to extend the temporary tax breaks, known as “extenders,” but it has sometimes done so late in the year and provided the benefits retroactively.

The tax breaks include a measure that allows older people to exclude from their taxable income donations made to charities directly from their individual retirement accounts, incentives for restaurants to donate excess food to charities, and tax deductions for property donations made to benefit land-conservation efforts.

Because the expired tax breaks benefit a wide range of groups, the United Way’s Mr. Taylor believes Congress will once again extend them. To do so, he says, lawmakers will need to keep them grouped together to attract the broadest base of support and attach them to a larger “must pass” bill that Congress urgently wants to enact.

But such swift legislative action will be difficult for the current Congress, Mr. Taylor and others say, especially in the months leading up to the midterm elections as political tensions between Democrats and Republicans are expected to increase.

If the tax breaks are passed at the end of the year and made retroactive, like they were last year, some of them will lose their potency, says Mr. Taylor.

For example, under the expired IRA measure, people who are at least 70 1/2 years old may withdraw up to $100,000 from their accounts without facing income taxes if they roll over the amount to charity.

But the rule is not as helpful if it is extended later in the year, Mr. Taylor says. “The donors that are incentivized to make the IRA rollover are trying to make some pretty complicated financial decisions,” he says. ”By that time, they’ve already withdrawn the money and done something else with it.”

Marketing Challenges

The tax benefit’s here-today-gone-tomorrow nature has made it difficult to market to potential donors, says Stuart Sullivan, the chief development officer at the Children’s Hospital of Philadelphia Foundation.

About 50 donors used the rollover to give a combined $1-million over the past seven years to the hospital’s financial arm. Though that’s only a sliver of the nearly $70-million in revenue from grants and individual pledges the foundation notched in 2012, many contributors find it a good way to maximize their tax savings, Mr. Sullivan says.

“It’s a big incentive for moderate-level donors,” he says. “They might be making gifts they might not otherwise make.”

Send an e-mail to Alex Daniels.