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 organizations whose purpose is to provide medical or hospital care, or medical education or research. To be eligible, organizations must be not-for-profit.

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 which 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 health organizations.

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.

The provisions enacted in 2004 resulted from Internal Revenue Service and congressional concerns that taxpayers were claiming inflated charitable deductions, causing the loss of federal revenue. In the case of vehicle donations, concern was expressed about the inflation of deductions. GAO reports published in 2003 indicated that the value of benefit to charitable organizations from donated vehicles was significantly less than the value claimed as deductions by taxpayers. The 2006 enactments were, in part, a result of continued concerns from 2004.

Supporters note that contributions finance desirable activities such as hospital care for the poor. Further, the Federal Government would be forced to step in to assume some of the activities currently provided by health care organizations if the deduction were eliminated; however, public spending might not be available to make up all of the difference. In addition, 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. Contributions to religious organizations are far more concentrated at the lower end of the income scale than are contributions to health organizations, the arts, and educational institutions, with contributions to other types of organizations falling between these levels. However, the volume of donations to religious organizations is greater than to all other organizations as a group. In 2005, the American Association of Fund-Raising Counsel Trust for Philanthropy, Inc. (AAFRC) estimated that contributions to religious institutions amounted to 45 percent of all contributions ($93.2 billion), while contributions to health care providers and associations amounted to less than 21 percent ($22.5 billion).

Using current dollars, AAFRC reported giving to health increased by 4.8 percent in 2000, declined in 2001 and 2002, rose by 8.2 percent in 2003, 5.1 percent in 2004, and 2.7 percent in 2005.

There has been a debate concerning the amount of charity care being provided by health care organizations with tax-exempt status. In the 109th Congress, hearings were held by both the Senate Committee on Finance and the House Committee on Ways and Means to examine the charitable status of nonprofit health care organizations. Those who support eliminating charitable deductions note that deductible contributions are made partly with dollars which are public funds. They feel that helping out private charities may not be the optimal way to spend government money.

Opponents further claim that the present system allows wealthy taxpayers to indulge special interests and hobbies. To the extent that charitable giving is independent of tax considerations, federal revenues are lost without having provided any additional incentive for charitable gifts. It is generally argued that the charitable contributions deduction is difficult to administer and that taxpayers have difficulty complying with it because of complexity.

Selected Bibliography

• Aprill, Ellen P. “Churches, Politics, and the Charitable Contribution Deduction,” Boston College Law Review, v. 42 (July 2001), pp. 843-873.
• Bennett, James T. and Thomas J. DiLorenzo. Unhealthy Charities: Hazardous to Your Health and Wealth, New York: Basic Books, c. 1994.
• — . “What’s Happening to Your Health Charity Donations?,” Consumers’ Research, v. 77 (December 1994), pp. 10-15.
• — . “Voluntarism and Health Care,” Society, v. 31 (July-August 1994), pp. 57-65.
• Bloche, M. Gregg. “Health Policy Below the Waterline; Medical Care and the Charitable Exemption.” Minnesota Law Review, v. 80 (December 1995), pp. 299-405.
• 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.
• 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.
• 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.
• Burns, Jack. “Are Nonprofit Hospitals Really Charitable?: Taking the Question to the State and Local Level,” Journal of Corporation Law, v.29, no. 3, pp. 665-681.
• Clark, Robert Charles. “Does the Nonprofit Form Fit the Hospital Industry?” Harvard Law Review, v. 93 (May 1980), pp. 1419-1489.
• 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 Non Profit Organizations.” In Economic Effects of Fundamental Tax Reform, Eds. Henry J. Aaron and William G. Gale. Washington, DC: Brookings Institution, 1996.
• 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.
• 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.
• Feenberg, Daniel. “Are Tax Price Models Really Identified: The Case of Charitable Giving,” National Tax Journal, v. 40, no. 4 (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/Aug. 2001), pp. 16-17.
• Frank, Richard G., and David S. Salkever. “Nonprofit Organizations in the Health Sector.” Journal of Economic Perspectives, v. 8 (Fall 1994), pp. 129-144.
• Gentry, William M. and John R. Penrod. “The Tax Benefits of Not-For- Profit Hospitals,” National Bureau of Economic Research Working Paper Series, w6435, February 1998, pp. 1-58.
• 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 (Sept. 2001), pp. 433-450.
• Greenwald, Leslie, Jerry Cromwell, Walter Adamache, Shulamit Bernard, et al. “Specialty Versus Community Hospitals: Referrals, Quality, And Community Benefits,”Health Affairs; v. 25, Jan/Feb 2006, pp. 106-119.
• Griffith, Gerald M. “What the IRS is Examining in CEP Audits of Health Care Organizations,” Journal of Taxation of Exempt Organizations, v. 11 (March/April 2000), pp. 201-212.
• Hall, Mark A. and John D. Colombo. ‘The Charitable Status of Nonprofit Hospitals: Toward a Donative Theory of Tax Exemption,” Washington Law Review, v. 66 (April 1991), pp. 307-411.
• Horwitz, Jill R., “Making Profits And Providing Care: Comparing Nonprofit, For-Profit, And Government Hospitals,” Health Affairs, v. 24, May/June 2005, pp.790-801.
• — ,”Why We Need the Independent Sector: The Behavior, Law, and Ethics of Not-For-Profit Hospitals,” University of Michigan Public Law and Legal Theory Research Paper No. 35, August 2003, pp. 1345-1411.
• Hyman, David A. “”The Conundrum of Charitability: Reassessing Tax Exemption for Hospitals,” American Journal of Law and Medicine, v. 16, (1990), pp. 327-380.
• Jacobson, Rachel. “The Car Donation Program: Regulating Charities and For-Profits,” The Exempt Organization Tax Review, v. 45, August 2004, pp. 213-229.
• 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.
• Morrisey, Michael A., Gerald J. Wedig, and Mahmud Hassan. “Do Nonprofit Hospitals Pay Their Way?” Health Affairs, v. 15 (Winter 1996), pp. 132-144.
• Omer, Thomas C. “Near Zero Taxable Income Reporting by Nonprofit Organizations,” Journal of American Taxation Association, v. 25 (Fall 2003), pp. 19-34.
• Owens, Bramer. “The Plight of the Not-for-Profit,” Journal of Healthcare Management, v. 50, July/August 2005, pp. 237-251.
• Randolph, William C. “Dynamic Income, Progressive Taxes, and the Timing of Charitable Contributions,” Journal of Political Economy, v. 103 (August 1995), pp. 709-738.
• — . “Charitable Deductions,” in The Encyclopedia of Taxation and Tax Policy, eds. Joseph J. Cordes, Robert D. Ebel, and Jane G. Gravelle. Washington, DC: Urban Institute Press, 1999, pp. 52-54.
• Sanders, Susan M., “Measuring Charitable Contributions: Implications for the Nonprofit Hospital’s Tax-exempt Status,” Hospital and Health Services Administration, v. 38 (Fall 1993), pp. 401-418.
• Smith, Bernard. “Charitable Contributions: A Tax Primer,” Cleveland Bar Journal, v. 72 (November 2000), pp. 8-11.
• Stokeld, Fred, “ETI Repeal Bill Would Tighten Rules on Vehicle, Patent Donations,” Tax Notes, October 18, 2004, pp. 293-294.
• 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, Government Accountability Office. Vehicle Donations: Benefits to Charities and Donors, but Limited Program Oversight, GAO Report GAO-04-73, Washington, DC: U.S. Government Printing Office (November 2003), pp. 1-44.
• — . Vehicle Donations: Taxpayer Considerations When Donating Vehicles to Charities, GAO Report GAO-03-608T, Washington, DC: U.S. Government Printing Office (April 2003), pp. 1-15.
• — . Nonprofit Hospitals: Better Standards Needed for Tax Exemption. Washington, DC: U.S. Government Printing Office (May 1990).
• U.S. Congress, House Select Committee on Aging. Hospital Charity Care and Tax Exempt Status: Resorting the Commitment and Fairness. Washington, DC: U.S. Government Printing Office (June 1990).
• — , Joint Committee on Taxation, Present Law and Background Relating to the Tax-Exempt Status of Charitable Hospitals, JCX-40-06, Washington, DC: U.S. Government Printing Office (September 2006), pp. 1-29.

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