2010 – banner year for philanthropy?

Published 1:49 pm Friday, November 5, 2010

Some institutions that depend on philanthropy for their existence are worried that proposed tax changes may dampen the enthusiasm for giving among the 89 percent of the U.S. population who donate regularly to charity.

For many, tax deductibility isn’t a factor, because only those who itemize their income tax returns can make use of it. But if tax deductibility is an important benefit for you, some changes may be in store after the end of 2010.

An income tax benefit for donations to charity has been part of the U.S. income tax code since 1917, four years after the income tax was instituted. While it is a boon to charities to be able to show a possible benefit to the donor, it represents a revenue loss to the Internal Revenue Service. Total revenue loss—from both individuals and corporations—was estimated at $47.4 billion in 2008 and $39.2 billion in 2009 (the weaker economy accounting for the drop). These figures contained in “Charitable Contributions for Haiti’s Earthquake Victims” by the Congressional Research Service in January 2010.

Under current rules, a $50,000 charitable donation from a taxpayer in the top tax bracket (35 percent in 2010) generates $17,500 in tax savings. However, under proposed legislation, the top rate applicable to charitable deductions would be capped at 28 percent, making the tax deduction worth somewhat less—that $50,000 donation referred to above would result in a tax savings of $14,000 if this legislation passes.

Clearly, giving in 2010 could provide a greater tax benefit than if you waited until next year.

IRA charitable rollover?

In 2008 and 2009, legislation made it possible for anyone 701\ 2 or older to roll over as much as $100,000 in traditional IRA funds to a charitable institution as a “qualified charitable distribution.”

The benefit to the taxpayer was that the distribution was not counted as income (traditional IRA distributions count as regular income in the year they are withdrawn).

While, at this writing, the provision has not been extended to 2010, the House of Representatives in May agreed to extend the rule through 2010. Taxpayers interested in taking advantage of this rule might want to stay alert for any Senate action and presidential signature that would make it law.

Return of Pease

Some philanthropically minded high-income earners are watching warily for the possible re-implementation of a rule first proposed by Ohio Rep. Don Pease—a phase-out applied to various itemized deductions for couples earning more than $254,550 and for singles earning more than $203,650.

As proposed, 3 percent of adjusted gross income (AGI) above those levels would be subtracted from allowable deductions. That is, if a couple report an AGI of $304,550, they would be required to subtract $1,500 from the total of their allowable deductions ($1,500 is 3 percent of the $50,000 in AGI that is above the $254,550 threshold).

It is uncertain whether the Pease provision will become the rule in 2011. It doesn’t exist in 2010, so it would not limit the value of your charitable deductions made this year.

Effects of deductions

How much the tax deductibility of charitable contributions actually affects American philanthropy is a point of contention.

Some point out that a large portion of giving comes from foundations, estates and corporations, as well as from individuals who do not itemize their contributions on their tax returns.

Itemized contributions represent 62 percent of total charitable giving, according to the Giving USA Foundation’s Annual Report on Philanthropy for the Year 2007, the most recent data available.

You may be among those who don’t think about your tax return when giving to charity—scholars who study charitable giving patterns say many don’t—but if you make substantial gifts and value the tax benefit, you could be affected if a cap is set on the value of your deductions.

No matter what your considerations are, if you’re intending to make a tax deductible philanthropic gift soon, you are likely to receive the best tax treatment if you make it in 2010 rather than waiting to see what happens in 2011.

Stephen P. Poitevint is a registered principal and financial adviser with the firm of Raymond James Financial Services Inc., member FINRA/SIPC, and is located at 908 Tallahassee Hwy., Bainbridge, Ga., and can be contacted at (229) 246-7208 or www.poitevint.com.