Bi-partisan bill would change tax code to boost charitable giving

WASHINGTON—Two senators this week filed legislation aimed at encouraging Americans to donate more money to charity.

“Charitable giving is core to our society and benefits millions of Americans each year,” said Sen. Ron Wyden, D-Ore., one of two co-sponsors. “This bipartisan bill improves the tax code making it easier for families to support their favorite charities and ensures that charitable organizations are best equipped to accomplish their missions.”

Wyden and Sen. John Thune, R-S.D., worked together to introduce the Charities Helping Americans Regularly Throughout the Year Act (CHARITY Act). The legislation is unlikely to pass in a presidential election year, but it shows bipartisan support for preserving and strengthening charitable giving as Congress inches closer to comprehensive tax reform that both parties agree is long overdue.

“Americans are some of the most generous people in the world, with more than two-thirds of households contributing to charitable causes each year,” Thune said. “Congress should make it as easy as possible for charities to fulfill their purpose.”

The CHARITY Act does not introduce new ideas—it mirrors in part, a House bill introduced last year—but seeks to maintain the current charitable deduction and consolidate some of the ideas to boost giving.

The bill prohibits a change “in the value or scope” of charitable deductions for individual donors, which currently links the deduction value to a person’s individual tax rate. For example, if a filer has a 15 percent tax rate, the person receives a 15 percent charitable deduction.

Some plans, including President Barack Obama’s last budget proposal, have called for capping deductions for higher income brackets, but the CHARITY Act would eliminate the ceiling to create more giving incentive.

In December, new rules to incentivize senior citizens to give became permanent. The rules allowed IRA owners taking mandatory distributions after age 70 and a half, to redirect those funds to charities without the money ever counting as income.

The Wyden-Thune bill expands this rollover method so seniors can redirect IRA distributions to donor-advised funds.

“Donor-advised funds are the largest growing philanthropic vehicle in the Unites States right now,” said Joanne Florino, senior vice president for public policy at The Philanthropy Roundtable, which applauded the Wyden-Thune bill.

Under the new proposal, IRA owners could place their distributions into a donor-advised fund for gifts later, rather than choose a charity right away or face higher taxes on an increased income.

“This is obviously an attractive way for retirees to give,” Florino told me. “And this now gives donors many more options.”

The other major part of the CHARITY Act deals with the private foundation excise tax. Currently a two-tiered system, tax law requires private foundations to pay an annual excise tax of 2 percent of their net investment income. But organizations can cut that tax in half if a foundation’s donations exceed its five-year average.

Originally created for foundations to give more charitable gifts each year, the tax now makes organizations wary of giving too much in a given year, fearing an unattainable five-year average to beat in the future.

Normally this is not a problem, but during a natural disaster, for example, foundations may not want to dole out too much cash at once—sometimes hindering potential gifts for those in crisis. Depending on the market, reverting to the 2 percent rate can cost large nonprofits millions of dollars in extra taxes.

According to Giving USA, Americans donated an estimated $358.38 billion to charity in 2014. About 87 percent of those gifts came from individuals and donations from private foundations.

Wyden is the top Democrat on the Senate Finance Committee, which makes his backing particularly notable. Philanthropy advocates are hopeful the Senate will rise above expectations and push the CHARITY Act through—possibly during the lame duck session after November.

The Alliance for Charitable Reform, the Philanthropy Roundtable’s public policy arm, will begin lobbying for additional co-sponsors next week.

“We believe these policies are a way to ramp up giving in the United States,” Florino said. “We’re extremely grateful to have this down on paper right now. Because these things tend to get taken off the shelf when comprehensive tax reform rolls around.”