SFC working group, individual provisions, part 1

The Senate Finance Committee’s bipartisan tax working group outlined a handful of options on charitable giving last week. The options appear in the report on individual tax provisions. 

Considering the breadth of the individual income tax, the report is relatively brief at a mere 48 pages. Charitable giving consumes about 1/3 of the total options. The working group explains the narrow focus in the introduction: “Given the short time allowed for the Working Group process and the complexity associated with individual tax reform, the Working Group chose to focus on the areas that appeared most ripe for possible bipartisan consensus: Homeownership, Charitable Giving, Higher Education, and Tax Administration.”

Changes to the charitable deduction are thus are very much on the table. But it is important to put the options in context. By limiting discussion to consensus items, we should not read too much into the fact that broad structural reforms of the charitable deduction – such as imposition of an AGI-based floor, or conversion of the deduction to a credit – are not mentioned. Surely, they were discussed but no consensus yet reached.

So what is mentioned in the report? Broadly, the bipartisan staff appear open to two provisions that have already passed the House (as part of the America Gives More Act) and that have long been part of the annual extenders headache: make permanent (1) the exclusion for distributions from an IRA to a qualifying charity and (2) the special giving incentives for conservation easements. As part of a reform document, these options might induce yawns (and perhaps pique). However, the bipartisan staff’s overall view of both provisions comes across as rather skeptical.

On the IRA distribution provision, the staff cautions that there should be a balance between encouraging charitable giving and ensuring that individuals have enough funds for retirement, thus suggesting a countervailing policy concern. The staff also intimates a factor rarely mentioned in discussion of this provision – namely that donors not only avoid the charitable percentage limitations (which is well known), but also, by excluding the IRA distributions from income, reduce their adjusted gross income for the tax year. A lower AGI generally is taxpayer friendly because AGI is used as a threshold for phaseouts and for various tax benefits. Thus, the staff acknowledges a concern that if the IRA provision is made permanent (and certainly if it is expanded) lawmakers should be clear in weighing the benefits of any increased charitable giving with the tax costs – which are not limited to waiving the charitable percentage limitations but may include other, noncharitable-related tax benefits to donors.

Another intriguing glimpse of the future emerges in the discussion of possible expansions to the IRA distribution provision. The staff seems open to allowing donor-advised funds, supporting organizations, private foundations, and split-interest trusts to become eligible distributees. But the staff also gives credence to present law limits by acknowledging the policy fault-line between charities that conduct active programs as opposed to primarily grant-making charities like private foundations and DAFs. The staff also, perhaps for the first time, suggests that not all DAFs should be treated the same – noting that DAFs sponsored by community foundations perhaps are “better” for this purpose than other DAFs. This also raises interesting definitional questions about how to distinguish among sponsoring organizations for tax purposes. If DAFs sponsored by community foundations are eligible under the IRA provision, how will they be distinguished from DAFs sponsored by commercial financial firms?

In any event, clearly staff is focused on a bipartisan basis on questions not directly raised in the report: the active versus passive charity distinction and whether new rules for DAFs are warranted. Both issues were very much implicated in the Tax Reform Act of 2014 introduced in the House, signaling more to come.

The easement/property proposals will be considered in a future post.

Roger Colinvaux