| Our Guide, Avoiding Trouble While Doing Good, A Guide for the Non-Profit Director and Officer, devotes an entire module to fundraising issues, as well a module to the tax aspects of charitable giving. You should buy
a copy of our Guide today. Call us at 773-325-2124
for additional information, or visit our website at http://www.charitygovernance.com. We also do on site training. Be sure to consider a donation to the a reputable relief organization to aid the victims of the South Asia earthquake-tsunamis disaster. |
January 31, 2005. Under current law, taxpayers
would have to wait until next year’s filing season to claim a tax deduction for
tsunami related gifts made after December 31, 2004. The proposal would be limited to cash gifts
made specifically for disaster relief.”
It is a nice sentiment, but it is totally impractical, for the following three reasons:
Most notably, the 2004 income tax returns are already printed and the filing season officially began on January 1, 2005. So there is no mechanism for allowing the deduction on the return.
Many Americans rely on computerized tax preparation programs. Those programs are already in retail outlets. Sure changes could be made and downloaded as updates, but at what cost?
The press release limits the extension to contributions made for tsunamis disaster relief. That sounds straightforward, but the IRS could devote ten or twenty pages of regulations to defining qualifying relief. Even a donation to the American Red Cross raises issues. If the donation is not earmarked or is made to a fund other than the International Relief Fund, is it for tsunamis relief?
And Senator Baucus’ timing could not be worse. If Congress doesn’t enact the proposal (which we hope it doesn’t), you can bet that there will be those Americans who read stories about it and will claim the deduction anyway. This could result in expensive audits.
It may sound as if we are spoiling the party, but we suspect not. Don’t forget that many of those making contributions do not itemize their deductions. Consequently, they receive no tax benefit for those contributions. Those who itemize their deductions are probably more sophisticated from a tax planning standpoint. By December 27, 2004, the extent of the disaster was well known. We have no doubt that many itemizers took the then pending close of the 2004 tax year into account, making last minute donations to relief organizations. Even if some itemizers were not so tax savvy, if they are required to make estimated tax payments, they can take a 2005 charitable contribution deduction into account when figuring their estimated tax payments for 2005, providing some accelerated benefit.
And how much benefit is Senator Baucus talking about? Well, this isn’t a new deduction, it is simply an acceleration of an already allowable deduction by one year. Assuming a $1,000 contribution, 25% tax rate, and a 2.5% after-tax return on the accelerated tax savings, we are talking about a net after-tax benefit of $6.32 by our calculations (using monthly compounding and ignoring estimated taxes). We suspect that the victims of the South Asia earthquake-tsunamis would derive greater benefit if the Bush Administration increased the U.S. contribution to relief efforts by the amount it would cost the government to implement the Baucus proposal than would be raised at the margin by the proposal, itself.
Where we part company with Senator Baucus is his apparent belief that people’s behavior is tax driven. We strongly suspect that most people who have opened their pocket books did so out of compassion, not to get a tax deduction. But having said that, this tragedy should force Congress to finally give serious consideration to the CARE proposed tax legislation, which would permit non-itemizers to deduct some portion of their charitable contributions while still being allowed to claim the standard deduction. As is often the case with tax legislation affecting deductions, those in the top income tax brackets would receive the most benefit from Senator Baucus' proposal, with those in the lower brackets receiving no tax subsidy for their donations. This is simply what economists call an "upside-down subsidy."
In fact, Senator Baucus' proposal is a perfect example of the misguided belief in "Better Living Through Tax Policy" that permeates Washington, D.C. With the exception of tax advisors and return preparers, we would all have more money to give to the tsunamis victims if Congress would simplify the tax laws by eliminating all the social engineering that now clutters the law.
| THE
FOREGOING IS NOT AND SHOULD NOT BE TAKEN AS LEGAL ADVICE. IF LEGAL
ADVICE IS REQUIRED, THE NON-PROFIT OR OTHER PARTY IN QUESTION SHOULD
SEEK THE ADVICE OF QUALIFIED LEGAL COUNSEL. If you liked this post, please visit http://www.charitygovernance.com for a description of our Guide/Tutorial for non-profit directors and officers entitled “Avoiding Trouble While Doing Good: A Guide for the Non-Profit Director and Officer.” Copyright 2005, Auto Didactix LLC. All Rights Reserved. You may not copy any portion of this post to a computer "clipboard" for re-posting anywhere or e-mailing, or otherwise reproduce this post. If you want others to review this post, you may provide them with a link to this web blog. Any use of the material or ideas in this post by reporters or other publishers shall make reference to Jack Siegel, author of "Avoiding Trouble While Doing Good, A Guide for the Non-Profit Director and Officer" and this web blog. For additional information call 773-325-2124 |
