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Monday, February 11, 2013

Tax Issues Relating to Charitable Contributions and Organizations

Jane G. Gravelle Senior Specialist in Economic Policy 
Molly F. Sherlock 
Specialist in Public Finance

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 resulted 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. However, these returns on endowments have almost recovered to their prior levels.

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 American Taxpayer Relief Act of 2012 (P.L. 112-240). 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 gifts of food 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 budgets have proposed limiting itemized deductions’ value, including charitable contributions, to 28%. Other types of limits may be considered as part of tax reform.

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 main issue is whether and how minimum distribution requirements should be imposed, alongside other new regulations. The decline in educational institutions’ endowments had raised concerns that such declines may lead to tuition increases, although these assets have largely recovered. 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 24, 2013
Number of Pages: 29
Order Number: RL34608
Price: $29.95

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