The discussion draft (section 1403 of the draft legislation) would make numerous changes to the rules applicable to charitable contributions—changes that would generally restrict the tax benefit of a contribution made by an individual taxpayer to an exempt organization.
These changes, if enacted, generally would be effective for tax years after 2014:
- 2% floor - Charitable contributions would only be deductable to the extent they exceed 2% of the individual’s adjusted gross income (AGI).
- Extension of time to make contribution - Individual taxpayers would be permitted to deduct charitable contributions made after the close of the tax year, but before the due date of their income tax returns (generally April 15).
- AGI limitations - The AGI limitations on deductible contributions would be condensed, and the ability to carry over excess deductions would be repealed:
- The 50% limitation on cash contributions and 30% limitation on contributions of capital gain property to public charities and certain private foundations would be limited to 40% of AGI.
- The 30% contribution limit on cash contributions and 20% limitation on contributions of capital gain property that apply to organizations not covered by the current 50% limitation rule would be limited to 25% of AGI.
- Value of deduction generally limited to adjusted basis - The amount of any charitable deduction for a contribution of property generally would be limited to the adjusted basis of the contributed property—rather than fair market value. However, for the following types of property, the deduction would be based on the fair market value of the property less any ordinary gain that would have been realized if the property had been sold by the taxpayer at its fair market value: (1) publicly traded stock; (2) tangible property related to the purpose of the donee exempt organization; (3) any qualified conservation contribution; (4) any qualified research property; and (5) any qualified inventory contribution (for inventory contributed solely for the care of the ill, needy or infants). The proposal would preserve the current law rule that provides a higher valuation for the charitable deduction.
- Qualified conservation contributions - The temporary rules for conservation easements (limiting deductions to 40% of AGI), including the rules for farmers or ranchers (allowing a charitable deduction up to 100% of AGI for property used in agricultural or livestock production), would be made permanent. No deduction would be permitted for land reasonably expected to be used as a golf course. This portion of the proposed provisions, if enacted, would be effective for tax years after 2013.
- College athletic event seating right - A special rule that allows a charitable deduction of 80% of the amount paid for the right to purchase tickets for athletic events would be repealed.
- Income from intellectual property - Under the proposal, income from intellectual property contributed to a charitable organization would no longer be allowed as an additional contribution by the donor. The deduction for the contribution of the intellectual property would be retained.
The discussion draft proposals would increase the standard deduction so that 95% of taxpayers would no longer itemize their deductions. As such, most taxpayers would not realize a “direct” tax deduction for any of their charitable contributions.
For the anticipated 5% of taxpayers who would still itemize their individual income tax returns and claim deductions for their charitable contributions, the deduction would be significantly limited in a number of ways.
- First, the charitable deduction would be subject to a 2% floor so that any contributions that totaled less than 2% of the individual’s AGI would not be deductible.
- Second, most transfers of property would be valued at the donor’s basis—rather than at the fair market value (FMV) of the property. Publicly traded stock would be valued at FMV less any ordinary gain that would have been realized had the stock been sold.
- Finally, if the charitable contribution transfer exceeds the applicable percentage of the individual’s AGI, there would appear to be no mechanism for carrying forward any excess amounts as is currently allowed (i.e., for five years).
The discussion draft would put increased pressure on taxpayers to find the “sweet spot” between the minimum and maximum charitable limits in order to realize the tax benefit of their charitable contributions.
Consistent basis reporting between estate and person acquiring property from decedent
A provision of the discussion draft (section 1422 of the draft legislation) would require that the value of property as reported for estate tax purposes also be used as its basis for income tax purposes.
The estate would be required to report the value of the property to the IRS and to the beneficiary receiving the property. The provision would be effective for transfers for which an estate tax return is filed after the date of enactment.
A 20% accuracy-related penalty could be imposed on incorrectly reported basis.