President Bush’s FY 2005 budget proposal includes several tax incentives to encourage charitable giving accompanied by several requirements that will limit taxpayer deductions.

While the CARE Act is still waiting action in a legislative conference committee, the president recently proposed many of its major tax incentives for charitable giving in his FY 2005 budget. If the CARE Act does finally make it to the president, it is clear that he will sign the piece of legislation into law because much of it will duplicate his intentions as expressed in his FY 2005 budget. Some of these incentives include:

• Non-itemizer Deduction: To allow nonitemizers to deduct contributions of $250 for single filers and $500 for joint filers, with a ceiling of $250 on the amount deducted ($500 for married couples filing jointly. The White House has estimated the cost spread out over ten years at $12 billion. The same provision is found in the House’s version of CARE (H.R.7), but has been argued as an expensive provision that yields little in the way of giving.
• IRA Rollover: Donors age 65 and over could donate directly from their individual retirement accounts (IRA) without paying income taxes on the donated amounts. This provision is estimated by the White House to cost $3.5 billion over ten years. The IRA rollover idea can be found in both the House and Senate version of CARE. The House version sets the donor age at 70 1/2, while the Senate version (S.476) sets the age at 59 1/2.
• Excise Tax: Foundations would see a flat rate excise tax on their business investment income of one percent. Today, foundations pay up to two percent excise tax on their investment income. Foundations claim that this reduction to a flat one percent rate would enable them to give more to charities. The White House has estimated the cost to be $1 billion over ten years.
• Food Contributions: All taxpayers engaged in trade or business will be included in the extension of the tax deduction for food inventory donations. Currently, only certain companies can deduct food inventory contributions and the deduction had to be assumed as less than fair market value. Bush’s proposal would allow for more players to contribute food inventory and the deduction would be increased to fair market value or two times the typical costs in the inventory (which ever is less.) However, S corporations and non-corporate taxpayers would be limited to 10 percent of income from trade or business. Estimated cost submitted by the White House is $1.2 billion over ten years.
• Remainder Trusts: Instead of losing their federal income tax-exemption for the year they invested in unrelated business activity, charitable remainder trusts will have to pay 100 percent excise tax on their unrelated business earnings. The administration estimates that the change would cost $68 million over ten years.
• Appreciated Property: Shareholders of S corporations will be given a better rate on their deduction for contributions of appreciated property (stock shares). The deduction ultimately lowers their income tax liability. The White House has estimated the cost at $239 million over ten years.
• $150 Million Limitation: The $150 million limitation on 501(c)(3) bonds is proposed to be repealed entirely. The cost of the repeal has been estimated at $94 million over a ten-year period.
• Restrictions on Bonds: 501(c)(3) organizations use of tax-exempt financing to acquire existing residential rental property for charitable purpose would be condoned. Currently, an 501(c)(3) can use tax-exempt financing to acquire residential rental property for charitable purpose only if the property is rented to low-income tenants or is substantially rehabilitated. Bush’s proposal lifts those limitations. The White House says the cost spread out over ten years is $299 million.

Conversely, Bush’s budget proposal included some provisions that would burden non-cash donors with new requirements for proof of value and set limits on deductions. The IRS has already put out announcements stating that they are getting prepared to crackdown on some of these non-cash contributions to charities. Specifically, on Dec. 22, 2003 the IRS issued an Information Release announcing the tightening of rules regarding donations of intellectual property. The Information Release was coupled with a Revenue Notice in which the IRS spelled out in detail the abuses for which it is now watching. Adopting some of these concerns over tax deduction abuse, President Bush proposed the following provisions:

• Intellectual Property: Sets limit on deductions for gifts of patents and other intellectual property (other than certain copy-rights) to charity to the lesser of the property’s fair market value or the amount it cost the donor to produce the property. Currently the gift values of intellectual property are estimated by the fair market value of the property at the time of donation, and are increased by the perceived revenue if property was marketed commercially. Under Bush’s proposal, donors could only deduct income that was actually earned by the charity that receives it (including future deductions for up to ten years or the life of the patent in royalties.) The Treasury claims that this proposal could add $3.2 billion in tax payments over ten years.
• Car Donations: Requires donors to seek independent appraisals of any automobile donated. Currently, donors may deduct fair-market value as established by established used car pricing guides, as long as the car’s value did not exceed $5,000. Bush proposal would only allow car donations to be deducted if the taxpayer obtains a qualified appraisal of the vehicle. If this change is adopted, the White House says it would bring the government $1.2 billion over ten years. Read IRS’ News Release, “IRS Officials Urge Caution and Care for Those Making a Car Donation.”
• Property Donations: Any items, other than stock or inventory, donated to charities by companies must be independently appraised if the deduction claimed exceeds $5,000. Donations claimed to be over $500,000 must have the appraisal attached to the return. This proposal would bring all companies in line with policy regulations already set for individuals. The White House expects this proposal to bring in $367 million over ten years.

The House and Senate will be debating the president’s budget proposal and will be drafting their own version of the 2005-spending plan. The president’s proposed budget is important because it sets the stage for the overall federal fiscal policy in three main categories – how much money the government should spend overall, how much should be taken in tax revenues, and how much deficit or surplus government should run. For more background information on the federal government’s budget process see the Center for Budget Policy Priorities’ .