This is the first of a two-part series about the issues ACR members will discuss in meetings with congressional offices on July 8.
Members of the Alliance for Charitable Reform (ACR) leadership team are set to meet with members and staff of the House Ways and Means Committee and the Senate Finance Committee on Tuesday, July 8. The group will discuss some of the charity-related proposals in the tax reform discussion draft released earlier this year by House Ways and Means Chairman Dave Camp (R-MI). ACR thoroughly examined the Camp draft and engaged its members and colleagues in the field for feedback in evaluating these provisions. ACR ultimately identified four that raise serious concerns: three related to the charitable deduction and one related to donor-advised funds. This post will highlight the three provisions related to the charitable deduction.
While the Camp draft ultimately preserves the charitable deduction— a decision that ACR wholeheartedly applauds—it does alter the deduction in ways which would ultimately cause a significant reduction in charitable giving. The proposed changes to the charitable deduction are as follows:
The 2% Floor
This proposal eliminates the charitable deduction for all gifts that fall below 2% of a donor’s Adjusted Gross Income (AGI). When combined with other changes in the deduction, the floor effectively eliminates the charitable deduction for 95% of taxpayers. The charitable deduction was fashioned as a proxy for backing out all gifts to charity from a donor’s income, to insure that those gifts are not taxed. To limit the charitable deduction for most taxpayers means that those gifts will be taxed for the first time in history.
AGI Limit for Cash Donations
Under current law, donors receive a deduction for cash gifts up to 50% of their AGI. For capital assets, donors can take a deduction for gifts up to 30% of their AGI. The provision included in the Camp proposal streamlines those limits to 40%, effectively discouraging gifts of cash and encouraging gifts of capital assets.
Charities typically prefer cash gifts, which can be more quickly absorbed and put to work, especially by human service charities.
Limiting Donor’s Assets to Basis
But while the Camp draft significantly favors capital assets over cash in one area, it includes another proposal that actually claws back the deduction for certain types of assets. For closely held stock and real estate, two of the most common capital assets donated to charity, the proposal generally limits a donor’s charitable deduction to the donor’s basis in the asset, while current law allows a deduction for fair market value. These new limits will radically affect major gift programs, seriously reduce the amount of large noncash gifts, and hinder foundation formation.
Taken together, these proposed changes would hurt charitable giving at both ends of the spectrum, discouraging donors of all income types from traditional forms of giving.
Tomorrow, we will explain how the Camp draft sets its sights on donor-advised funds. We will also identify the proposals in the Camp draft that we support.