Background on Charitable Incentives and Reform Provisions
in Tax Legislation

On August 17, 2006, President Bush signed into law the Pension Protection Act (Pub. Law 109-280) that includes a package of charitable giving incentives and safeguard measures.

Previous Action
Independent Sector sent a letter to President Bush on July 24, 2006, asking him to help secure passage of a package of charitable giving incentives and safeguard measures as part of the pension reform legislation. The letter continues IS’s commitment to strengthening the charitable community by supporting this legislation, an effort that has included an earlier letter that IS and 100 leading charitable organizations delivered to House and Senate leaders urging enactment of this package.

A package of charitable incentives and safeguards was originally included in the Senate’s version of the tax reconciliation bill (H.R. 4297), passed by that chamber in November 2005. IS had been strongly supportive of many of the charitable giving incentives and charitable safeguards included in that bill. However, there were several specific provisions that we believed could be harmful to the charitable sector which prevented IS from providing our full support for the reforms as then drafted. As a result, since November 2005, IS worked closely with congressional tax staff to make needed changes to the reforms.

In May 2006, Congress passed the final version of the tax reconciliation bill (H.R. 4297) without a package of charitable giving incentives and reforms, however, one provision addressing abusive tax shelters was included that is broader than one recommended by the Panel on the Nonprofit Sector. The final version of the tax shelter provision dropped a reasonable cause exception, and added an excise tax on entities that are parties to a prohibited tax shelter transaction without knowing or having reason to know that the transaction is a prohibited transaction. This second tax is lower than the excise tax for knowing violations. See IRS guidance (PDF) on this provision.

Previous Action
In November 2005, the Senate passed its reconciliation tax legislation, the Tax Relief Act of 2005, (S. 2020). The bill contained extensions of expiring tax provisions, additional relief for hurricane-affected areas, as well as charitable giving incentives and a number of significant charitable reforms.

As modified by a manager's amendment, the bill reflected many of the reforms recommended by the Panel on the Nonprofit Sector to correct abuses by taxpayers in claiming excessive tax deductions and by individuals who have used charitable organizations for their personal gain. The legislation also included a significant package of incentives for charitable giving that are also in the CARE Act.

The bill's reforms included penalties for involvement in tax shelter transactions; increased punishment for self-dealing and excess benefit transactions; reform of donor-advised funds and supporting organizations; new restrictions on credit counseling organizations; limits on deductions for façade easements and donations of clothing and household items; and new standards and penalties for appraisals of property donations.

Among the charitable giving incentives was a measure that would allow older taxpayers to make tax-free distributions from IRAs directly to charitable organizations. In addition, the bill would have permitted all taxpayers to deduct charitable contributions totaling $210 or more ($420 for joint filers). Taxpayers who do not itemize deductions would be permitted to deduct only their cash contributions, while those who do itemize would be permitted to include both cash and non-cash contributions in calculating their deductions. See fact sheet on Charitable Deduction Changes for Itemizers and Non-Itemizers.

• Joint Tax Committee description of charitable provisions in the Senate Finance Committee bill (PDF)
• CRS Report on Charitable Incentives in Recent Legislation (PDF)...12/1/05
• Letter in Support of the Nonitemizer Provision (PDF)
• Fact Sheet on Charitable Deduction Changes for Itemizers and NonItemizers (PDF)
• CBPP Analysis of Nonitemizer/ Itemizer Provision (PDF)

Last Updated: October 17, 2007

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