All text from: Congressional Research Service (CRS). “Tax Expenditures: Compendium of Background Materials on Individual Provisions.” December 2008. GPO: Washington DC.

Description

Subject to certain limitations, charitable contributions may be deducted by individuals, corporations, and estates and trusts. The contributions must be made to specific types of organizations, including scientific, literary, or educational organizations.

Individuals who itemize may deduct qualified contribution amounts of up to 50 percent of their adjusted gross income (AGI) and up to 30 percent for gifts of capital gain property. For contributions to nonoperating foundations and organizations, deductibility is limited to the lesser of 30 percent of the taxpayer’s contribution base, or the excess of 50 percent of the contribution base for the tax year over the amount of contributions which qualified for the 50-percent deduction ceiling (including carryovers from previous years). Gifts of capital gain property to these organizations are limited to 20 percent of AGI.

The maximum amount deductible by a corporation is 10 percent of its adjusted taxable income. Adjusted taxable income is defined to mean taxable income with regard to the charitable contribution deduction, dividends-received deduction, any net operating loss carryback, and any capital loss carryback. Excess contributions may be carried forward for five years. Amounts carried forward are used on a first-in, first-out basis after the deduction for the current year’s charitable gifts have been taken. Typically, a deduction is allowed only in the year in which the contribution occurs. However, an accrual-basis corporation is allowed to claim a deduction in the year preceding payment if its board of directors authorizes a charitable gift during the year and payment is scheduled by the 15th day of the third month of the next tax year.

If a contribution is made in the form of property, the deduction depends on the type of taxpayer (i.e., individual, corporate, etc.), recipient, and purpose.

As a result of the enactment of the American Jobs Creation Act of 2004, P.L. 108-357, donors of noncash charitable contributions face increased reporting requirements. For charitable donations of property valued at $5,000 or more, donors must obtain a qualified appraisal of the donated property. For donated property valued in excess of $500,000, the appraisal must be attached to the donor’s tax return. Deductions for donations of patents and other intellectual property are limited to the lesser of the taxpayer’s basis in the donated property or the property’s fair market value. Taxpayers can claim additional deductions in years following the donation based on the income the donated property provides to the donee. The 2004 act also mandated additional reporting requirements for charitable organizations receiving vehicle donations from individuals claiming a tax deduction for the contribution, if it is valued in excess of $500.

Taxpayers are required to obtain written substantiation from a donee organization for contributions that exceed $250. This substantiation must be received no later than the date the donor-taxpayer files the required income tax return. Donee organizations are obligated to furnish the written acknowledgment when requested with sufficient information to substantiate the taxpayer’s deductible contribution.

The Pension Protection Act of 2006 (P.L. 109-280) included several provisions that temporarily expand charitable giving incentives. The provisions, effective after December 31, 2005 and before January 1, 2008, include enhancements to laws governing non-cash gifts and tax-free distributions from individual retirement plans for charitable purposes. The 2006 law also tightened rules governing charitable giving in certain areas, including gifts of taxidermy, contributions of clothing and household items, contributions of fractional interests in tangible personal property, and record- keeping and substantiation requirements for certain charitable contributions. Temporary charitable giving incentives were further extended by the Economic Emergency Economic Stabilization Act of 2008 (P.L. 110-343) enacted in October 2008.

Impact

The deduction for charitable contributions reduces the net cost of contributing. In effect, the federal government provides the donor with a corresponding grant that increases in value with the donor’s marginal tax bracket. Those individuals who use the standard deduction or who pay no taxes receive no benefit from the provision.

A limitation applies to the itemized deductions of high-income taxpayers. Under this provision, initially a phaseout applied which reduced itemized deductions by 3 percent of the amount by which a taxpayer’s adjusted gross income (AGI) exceeds an inflation adjusted dollar amount ($166,800 in 2009). This phase out is, in turn being phased out, and in 2009 is reduced by two thirds. It is eliminated in 2010, but after that year the elimination of the phaseout expires, unless extended. The table below provides the distribution of all charitable contributions, not just those to educational organizations.

Before the 2004 enactment, donors could deduct the fair market value of donations of intellectual property. The new restrictions may result in fewer such donations to universities and other qualified institutions. The need to account for any increased income attributable to the donation might involve more work for recipient institutions.

Rationale

This deduction was added by passage of the War Revenue Act of October 3, 1917. Senator Hollis, the sponsor, argued that high wartime tax rates would absorb the surplus funds of wealthy taxpayers, which were generally contributed to charitable organizations.

It was also argued that many colleges would lose students to the military and charitable gifts were needed by educational institutions. Thus, the original rationale shows a concern for educational organizations. The deduction was extended to estates and trusts in 1918 and to corporations in 1935.

The provisions enacted in 2004 resulted from Internal Revenue Service and congressional concerns that taxpayers were claiming inflated charitable deductions, causing significant federal revenue loss. In the case of patent and other intellectual property donations, the IRS expressed concern not only about overvaluation of property, but also whether consideration was received in return for the donation and whether only a partial interest, rather than full interest, of property was being transferred. The 2006 enactments were, in part, a result of continued concerns from 2004.

Assessment

Most economists agree that education produces substantial “spillover” effects benefitting society in general. Examples include a more efficient workforce, lower unemployment rates, lower welfare costs, and less crime. An educated electorate fosters a more responsive and effective government. Since these benefits accrue to society at large, they argue in favor of the government actively promoting education.

Further, proponents argue that the Federal government would be forced to assume some activities now provided by educational organizations if the deduction were eliminated. However, public spending might not be available to make up all the difference. Also, many believe that the best method of allocating general welfare resources is through a dual system of private philanthropic giving and governmental allocation.

Economists have generally held that the deductibility of charitable contributions provides an incentive effect which varies with the marginal tax rate of the giver. There are a number of studies which find significant behavioral responses, although a study by Randolph suggests that such measured responses may largely reflect transitory timing effects.

Types of contributions may vary substantially among income classes. For example, contributions to religious organizations are far more concentrated at the lower end of the income scale than contributions to educational institutions. More highly valued contributions, like intellectual property and patents, tend to be made by corporations to educational institutions.

It has been estimated by the American Association of Fund-Raising Counsel Trust for Philanthropy, Inc. that giving to public and private colleges, universities, elementary schools, secondary schools, libraries, and to special scholarship funds, nonprofit trade schools, and other educational facilities amounted to $38.56 billion in calendar year 2005.

Opponents say that helping educational organizations may not be the best way to spend government money. Opponents further claim that the present system allows wealthy taxpayers to indulge special interests (such as gifts to their alma mater).

To the extent that charitable giving is independent of tax considerations, federal revenues are lost without any corresponding increase in charitable gifts. It is generally argued that the charitable contributions deduction is difficult to administer and adds complexity to the tax code.

Selected Bibliography

• Aprill, Ellen P. “Churches, Politics, and the Charitable Contribution Deduction,” Boston College Law Review, v. 42 (July 2001), pp. 843-873.
• Arnone, Michael. “Congress Approves Lower Tax Benefits for Donations of Intellectual Property,” Chronicle of Higher Education, v. 51, iss. 9, October 22, 2004, p. A36.
• Boatsman, James R. and Sanjay Gupta, “Taxes and Corporate Charity: Empirical Evidence from Micro-Level Panel Data,” National Tax Journal, Vol. 49, June 1996, pp. 193-213.
• Broman, Amy J. “Statutory Tax Rate Reform and Charitable Contributions: Evidence from a Recent Period of Reform,” Journal of the American Taxation Association. Fall 1989, pp. 7-21.
• Giving USA 2006, The Annual Report on Philanthropy for the Year 2005, The Center on Philanthropy At Indiana University. Indiana University- Purdue University, Indianapolis: 2006.
• Buckles, Johnny Rex. “The Case for the Taxpaying Good Samaritan: Deducting Earmarked Transfers to Charity Under Federal Income Tax Law, Theory and Policy,” Fordham Law Review, v. 70 (March 2002), pp. 1243- 1339.
• “Bush Signs Corporate Tax Legislation Restricting Donations of Intellectual Property,” Higher Education and National Affairs, October 27, 2004.
• Crimm, Nina J. “An Explanation of the Federal Income Tax Exemption for Charitable Organizations: A Theory of Risk Compensation,” Florida Law Review, v. 50 (July 1998), pp. 419-462.
• Clotfelter, Charles T. “The Impact of Tax Reform on Charitable Giving: A 1989 Perspective.” In Do Taxes Matter? The Impact of the Tax Reform Act of 1986, edited by Joel Slemrod, Cambridge, Mass.: MIT Press, 1990.
• — . “The Impact of Fundamental Tax Reform on Nonprofit Organizations.” In Economic Effects of Fundamental Tax Reform, Eds. Henry J. Aaron and William G. Fale. Washington, DC: Brookings Institution Press, 1996, pp. 211-246.
• Colombo, John D. “The Marketing of Philanthropy and the Charitable Contributions Deduction: Integrating Theories for the Deduction and Tax Exemption,” Wake Forest Law Review, v. 36 (Fall 2001), pp. 657-703.
• Feenberg, Daniel. “Are Tax Price Models Really Identified: The Case of Charitable Giving,” National Tax Journal, v. 40, (December 1987), pp. 629- 633.
• Feldman, Naomi and James Hines, Jr. “Tax Credits and Charitable Contributions in Michigan,” University of Michigan, Working Paper, October 2003.
• Fisher, Linda A. “Donor-Advised Funds: The Alternative to Private Foundations,” Cleveland Bar Journal, v. 72 (July/August 2001), pp. 16-17.
• Gravelle, Jane. Economic Analysis of the Charitable Contribution Deduction for Nonitemizers, Library of Congress Congressional Research Service Report RL31108, April 29, 2005.
• —. Tax Issues Relating to Charitable Contributions and Organizations, Library of Congress, Congressional Research Service report RL34608, August 5, 2008.
• Green, Pamela and Robert McClelland. “Taxes and Charitable Giving,” National Tax Journal, v. 54 (September 2001), pp. 433-450.
• Hasselback, James R. and Rodney L. Clark. “Colleges, Commerciality, and the Unrelated Business Income Tax.” Taxes, v. 74 (May 1996), pp. 335- 342.
• Jones, Darryll K. “When Charity Aids Tax Shelters,” Florida Tax Review, v. 4 (2001), pp. 770-830.
• Joulfaian, David and Mark Rider. “Errors-In-Variables and Estimated Income and Price Elasticities of Charitable Giving,” National Tax Journal, v. 57 (March 2004), pp. 25-43.
• Kahn, Jefferey H. “Personal Deductions: A Tax “Ideal” or Just Another “Deal”?,” Law Review of Michigan State University, v. 2002 (Spring 2002), pp. 1-55.
• Lankford, R. Hamilton and James H. Wyckoff. “Modeling Charitable Giving Using a Box-Cox Standard Tobit Model,” Review of Economics and Statistics, v. 73 (August 1991), pp. 460-470.
• Omer, Thomas C. “Near Zero Taxable Income Reporting by Nonprofit Organizations,” Journal of American Taxation Association, v. 25, Fall 2003, pp. 19-34.
• Randolph, William C. “Charitable Deductions,” in The Encyclopedia of Taxation and Tax Policy, eds. Joseph J. Cordes, Robert O. Ebel, and Jane G. Gravelle. Washington, DC: Urban Institute Press, 2005.
• — . “Dynamic Income, Progressive Taxes, and the Timing of Charitable Contributions,” Journal of Political Economy, v. 103, August 1995, pp. 709-738.
• Rose-Ackerman, Susan. “Altruism, Nonprofits, and Economic Theory,” Journal of Economic Literature, v. 34 (June 1996), pp. 701-728.
• Stokeld, Fred, “ETI Repeal Bill Would Tighten Rules on Vehicle, Patent Donations,” Tax Notes, October 18, 2004, pp. 293-294.
• “Tax Exempt Educational Organizations,” Journal of Law and Education, v. 15. Summer 1986, pp. 341-346.
• Teitell, Conrad. “Tax Primer on Charitable Giving,” Trust & Estates, v. 139, (June 2000), pp. 7-16.
• Tiehen, Laura. “Tax Policy and Charitable Contributions of Money,” National Tax Journal, v. 54 (December 2001), pp. 707-723.
• Tobin, Philip T. “Donor Advised Funds: A Value-Added Tool for Financial Advisors,” Journal of Practical Estate Planning, v. 3 (October/November 2001), pp. 26-35, 52.
• U.S. Congress, Congressional Budget Office. Budget Options. See Rev-12, Limit Deductions for Charitable Giving to the Amount Exceeding 2 Percent of Adjusted Gross Income. Washington, DC: Government Printing Office (February 2005), p 281.
• U.S. Congress, General Accounting Office. Vehicle Donations: Benefits to Charities and Donors, but Limited Program Oversight, GAO Report GAO-04-73, Washington, DC: U.S. General Accounting Office. November 2003, pp. 1-44.
• — . Vehicle Donations: Taxpayer Considerations When Donating Vehicles to Charities, GAO Report GAO-03-608T, Washington, DC: U.S. General Accounting Office. April 2003, pp. 1-15.
• U.S. Congress, Joint Committee on Taxation, Technical Explanation Of H.R. 4, The “Pension Protection Act Of 2006,” as Passed by the House on July 28, 2006, and as Considered by the Senate on August 3, 2006, JCX-38-06, Washington, DC: U.S. Government Printing Office, August 3, 2006, pp. 1-386.
• — , Senate Committee on Finance. Staff Discussion Draft: Proposals for Reforms and Best Practices in the Area of Tax-Exempt Organizations, Washington, DC, June 22, 2004, pp. 1-19.
• U.S. Department of Treasury. “Charitable Giving Problems and Best Practices,” testimony given by Mark Everson, Commissioner of Internal Revenue, Internal Revenue Service, IR-2004-81, June 22, 2004, pp. 1-17.
• Wittenbach, James L. and Ken Milani. “Charting the Interacting Provisions of the Charitable Contributions Deductions for Individuals,” Taxation of Exempts, v. 13 (July/August 2001), pp. 9-22.
• — , “Charting the Provisions of the Charitable Contribution Deduction for Corporations,” Taxation of Exempts, v. 13 (November/December 2001), pp. 125-130.
• Yetman, Michelle H. and Robert J. Yetman. “The Effect of Nonprofits’ Taxable Activities on the Supply of Private Donations,” National Tax Journal, v. 56, March 2003, pp. 243-258.
• Zimmerman, Dennis. “Nonprofit Organizations, Social Benefits, and Tax Policy,” National Tax Journal, v. 44. September 1991, pp. 341-349.

All text from: Congressional Research Service (CRS). “Tax Expenditures: Compendium of Background Materials on Individual Provisions.” December 2008. GPO: Washington DC.