News and analysis
July 16, 2014

House to Vote on Bill to Encourage Charitable Giving

The House will likely pass a bill Thursday that is designed to encourage donations to charities, but the Senate will probably ignore the bill and look to move many of the provisions later this year in separate legislation.

The bill would reduce the foundation excise tax from 2 percent to 1 percent and extend the tax benefits of giving food to charity and donating land for conservation.

It also would allow people over 70 1/2 years old to reduce their taxable income when they roll over funds from their Individual Retirement Accounts to charities and extend the deadline for claiming a charitable tax deduction from the end of December until tax day, April 15.

The tax provisions are part of a package of about 60 "tax extenders" that have been regularly renewed annually for more than a decade. House Republicans have split them into small groups to pass separately, but the Democratic-led Senate prefers to pass tax extenders as a group.

The retirement-account, food-­donation, and land-conservation provisions expired in December. They would be extended retroactively and made permanent, rather given than the usual one-year extension. The extended deadline for claiming a charitable deduction and the excise-tax reduction are new measures.

"There seems to be a general consensus that these items will be addressed," said Sue Santa, senior vice president for public policy at the Council on Foundations. "But it remains to be seen how the House and Senate will resolve these different approaches."

The five charity tax provisions would cost the U.S. Treasury about $16-billion in forgone taxes over 11 years. Democrats criticized the plan for not providing revenue to offset those losses and slammed Republicans for insisting on similar offsets in previous debates over the extension of unemployment insurance. Rep. Sander Levin of Michigan, the House Ways and Means Committee’s ranking Democrat, wrote that while there was strong support for charities among Democrats, Republicans should have included other tax extenders in the legislation rather than singling out charitable provisions.

"This approach was both fiscally irresponsible and fundamentally hypocritical," he wrote.

2-Tiered System

Foundation excise taxes on net investment income are currently levied on a two-tier basis. The regular tax is 2 percent, but if a private foundation makes grants that exceed its average payout amount over five years, it qualifies for a 1-percent tax. The result is that many mostly large foundations that retain high-level accountants are able to juggle their balance sheets late in a tax year to qualify for the lower rate.

During the economic downturn, when investment returns stagnated and foundation grantees especially needed support, foundations increased their payouts, making it harder for them to qualify for the lower rate, according to Joanne Florino, senior vice president for public policy at the Philanthropy Roundtable.

The two-tiered system "turned out to be a deterrent to increasing giving in times of need," she said.

Giving taxpayers until April 15 to claim a charitable deduction for the previous tax year will give people, especially business owners, time to go over their finances and determine how much to give.

"It will spur increased giving," Ms. Florino said. "People will be able to make a charitable contribution with a more fulsome knowledge of the tax benefit."

Last-Minute Decisions

In a 2013 paper, Eugene Steuerle of the Brookings Institution suggested that people are prone to make decisions at the very last minute. He predicted that charities and foundations, working with tax-preparation software companies, could take advantage of that to increase those last-minute gifts.

Diana Aviv, president of Independent Sector, a nonprofit membership organization, predicted the later date would cause charitable gifts to surge. "There’s no skin off of anybody’s nose," she says. "This is an incredible leveraging opportunity for lawmakers."

This week, Ms. Aviv gathered signatures from leaders of 850 nonprofit organizations and sent a letter to lawmakers urging them to pass the charity tax-extender provisions.

In the heat of an election year, lawmakers want to return to their districts with accomplishments to showcase. Passing legislation designed to help charities, Ms. Aviv said, would be well-received by many voters.