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Tuesday, February 15, 2011

Tax Issues Relating to Charitable Contributions and Organizations

Jane G. Gravelle
Senior Specialist in Economic Policy

Molly F. Sherlock
Analyst in Economics

Prior to the financial crises and subsequent recession, the value of tax benefits for charitable  contributions and organizations was estimated to be around $100 billion per year. About half of  this cost arose from the deductions for charitable contributions with the other half from  exemptions of earnings of nonprofits. In 2010, the deduction for charitable contributions results  in an estimated $40 billion in federal revenue losses. On average, endowment investments in  2009 experienced losses, meaning that the federal government did not lose revenues from  exempting asset returns from taxation.

This report provides an overview of recent changes affecting tax-exempt and charitable  organizations, while also discussing issues that may be of legislative interest in the future. The  Pension Protection Act (P.L. 109-280) included a number of restrictions related to charitable  contributions as well as restrictions on tax-exempt organizations. These changes are briefly  surveyed.

In addition to changes regarding the treatment of charitable contributions and tax-exempt  organizations that have been made in recent years, several issues may be considered in future  legislation. A number of provisions related to charitable contributions were extended temporarily  as part of the tax extenders in the Tax Relief, Unemployment Reauthorization, and Job Creation  Act of 2010 (P.L. 111-312). Most of the charitable extenders were contained in legislation first  introduced in 2001. Some provisions were enacted temporarily in 2005; further provisions and  extensions occurred in 2006, in the Pension Protection Act. These extenders include an individual  retirement account (IRA) rollover, liberalized treatment of certain gifts of inventory and  conservation property, and two more technical provisions.

Limitations on itemized deductions have been proposed as part of the Fiscal Commission’s  recommendation. President Obama’s FY2010 and FY2011 Budgets propose limiting itemized  deductions, including charitable contributions, to 28%. The Patient Protection and Affordable  Care Act (PPACA; P.L. 111-148), in response to concerns regarding charity care and community  benefits provided by tax-exempt hospitals, imposed new regulations.

Other issues that may arise reflect concerns about donor-advised funds and supporting  organizations (now under study at the Treasury Department) and educational institutions’  endowments. For donor advised funds and supporting organizations, the Treasury Department is  in the process of evaluating whether minimum distribution requirements should be imposed,  alongside other new regulations. The decline in educational institutions’ endowments have raised  concerns that such declines may lead to tuition increases. New reporting requirements for small  tax-exempt organizations, enacted under the Pension Protection Act (P.L. 109-280) may cause a  number of noncompliant tax-exempt entities to lose their tax-exempt status.

Date of Report: January 18, 2011
Number of Pages: 28
Order Number: RL34608
Price: $29.95

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