Uncertainty Over Taxes May Affect Charitable Giving
But Adam was different. His shoes had holes on the bottom. He wore the same clothes every day. He needed a bath. The only time he had something to eat was during snack time at the center where I was helping out. Meeting Adam -- and spending time with him over the summer -- gave me a lot of perspective about my own circumstances and how poverty affects families and children. And years later, when I got a letter from Adam, telling me he was still in school, I realized that it was possible for one person to make a difference.
That experience made a real impression on me. Ever since then, I've committed to donating my time and resources to causes that support issues important to me. I'm not alone. Americans, as a whole, are a pretty generous people. Charitable giving topped $300 billion for 2007 and 2008, despite the economic slowdown, according to Giving USA Foundation. Estimates also suggest that as many as four in 10 Americans donated their time to a charitable cause in 2009.
Will that trend continue for 2010? Analysts aren't sure. Fourth quarter is typically the busiest time of year for most charities. With the coming of the holidays, donors tend to be in a charitable mood; many are also looking to qualify for a charitable deduction for the tax year. This year, however, uncertainty over tax provisions may be giving donors, especially wealthy donors, pause. Some changes in the tax code might change all that. Here are four ways Congress could kick-start charitable giving by year's end:
- Finalize plans for the federal estate tax. When it was originally enacted, one of the primary policy considerations for the federal estate tax was the redistribution of wealth. This was especially true on the charitable side; donations to qualifying charitable organizations resulted in deductions for federal estate-tax purposes. As a result, charitable and planned giving is a significant piece of most federally taxable estates. Without a federal estate tax, charitable organizations fear that donations will slow down dramatically. In fact, a study by the Congressional Budget Office from 2004 found that charitable donations at the top would decrease by as much as half if the federal estate tax were repealed. With the future of the federal estate tax uncertain, major donors may be holding out on making gifts. Some certainty on whether the tax will be renewed for 2010 (as most believe it will) and some guidance on rates and exemptions might spur some donors into action.
- Reconsider special tax breaks. Special tax breaks, like those for donations to Haiti for earthquake relief, have proved to be popular. And it feels like a good thing, right? Maybe not. Other charitable organizations are worried that donors might feel tapped out by year's end, since Congress allowed special breaks earlier in the year for gifts made to charities that benefit Haiti. Picking and choosing which charitable organizations are entitled to exceptions under the tax code is simply bad tax policy. If Congress wants to encourage charitable giving, they'll keep the rules consistent.
- Bring back IRA tax breaks. Last year, qualifying seniors could donate up to $100,000 from their individual retirement accounts (IRAs) directly to charity, tax-free. The amount distributed to the charity also counted as a required minimum distribution (RMD) for the year. Without the special provision, taxpayers are required to make a taxable withdrawal from their IRAs and then take a charitable deduction for the donation; the result isn't the same, for tax reasons, as a direct distribution. Congress didn't extend the provision in 2010, causing many seniors to rethink whether to make gifts in this manner. If the provision were extended, it would likely boost year-end giving for seniors.
- Keep tax rates low and deductions intact. There is a lot of uncertainty about tax rates for 2010. The Obama administration has promised to preserve tax cuts for the middle class but to allow them to expire for those in the top income brackets. A potential compromise would limit the number of itemized deductions, including those for charitable donations, while keeping the rates flat. This idea has been picking up support in Congress because it limits revenue losses and is similar to the scheme during the Reagan era, giving both liberals and conservatives something to tout. However, charitable organizations worry that the plan will discourage charitable giving for high-income taxpayers. Keeping rates low and not limiting deductions at the top might encourage potential donors to match their gifts from the prior year.