Washington News

In the State of the Union Address, the President suggested that there should be a 30% minimum tax for those with incomes over $1 million per year. This 30% minimum tax has been called the "Buffet Rule" tax after statements in support of this plan by businessman Warren Buffet.

This week, Sen. Sheldon Whitehouse (D-RI) introduced the Paying a Fair Share Act. This act creates a 30% tax rate on incomes over $2 million per year. For those with incomes from $1 million to $2 million, the tax is phased in.

Whitehouse stated, "As we continue working to restore our economy, it's more important than ever to make sure all Americans are paying their fair share toward our nation's success." He suggested that upper-income taxpayers should pay a fair rate and that his tax will help "fix" potential unfairness in the system.

Fortunately for philanthropy, the act includes a "modified charitable contribution deduction." For individuals who are subject to this higher minimum tax, their charitable itemized deductions will be adjusted upward so they save the same percentage of tax at the higher rate than they would have saved at their lower rate. In effect, the modified charitable contribution deduction is intended to protect the savings of their charitable gifts.

The Alliance for Charitable Reform (ACR) published a statement in support of this provision. ACR stated, "We appreciate the wide recognition that the charitable deduction is different from all other deductions in that it is an incentive for Americans to give away their money as compared to other deductions and credit incentives." ACR is a group of volunteer nonprofit leaders who support philanthropic freedom and increased giving.

Editor's Note: The inclusion of the modified charitable contribution deduction is very positive for philanthropy. While the proposals for taxing higher incomes may not be enacted this year, it is possible that one or more could be enacted in future years as the government attempts to address the deficit. It is a breakthrough for philanthropy that this bill recognizes the importance of charitable deductions and creates a separate category from all other types of itemized deductions. Hopefully, this principle will be followed in future legislation.

Tax Extenders – Repealed or Made Permanent?

At a hearing on the tax extenders by the Senate Finance Committee on January 31, Chair Max Baucus (D-MT) indicated that most of the 150 potential tax extenders are likely to be passed by November of 2012. However, he held the hearing in order to prepare for a major tax bill in 2013. Sen. Baucus suggested that the tax extenders should be first reduced and then the remaining made permanent.

Baucus stated, "We need to address these tax extenders to provide long-term certainty. And through tax reform we should evaluate each and every extender and determine whether it should be allowed to expire or made permanent."

The Ranking Member of the Senate Finance Committee is Sen. Orrin Hatch (R-UT). He agreed with Baucus that action needed to be taken on the extenders. Hatch stated, "The number of temporary tax provisions has grown from 42 in 1998 to 154 in 2011. Even those tax extenders that are sound tax policy lose much of their power due to their temporary character."

Hatch noted that he and Baucus agreed that there is a need for a comprehensive revision of the tax code in 2013. Presumably, this hearing and others will be the basis for action on tax extenders at that time.

One of the four witnesses at the hearing was Professor Calvin Johnson of Austin, Texas. He reviewed many of the tax extenders with larger revenue impact and created three categories. Johnson suggested repealing 13 of the extenders, modifying nine and was uncertain about three.

Several of the extenders he reviewed were in the charitable giving area. Johnson recommended the repeal of the increased deduction for corporate contributions of computer equipment for educational purposes, the enhanced deduction for contributions of food inventory, the enhanced deduction for gifts of book inventories of public schools, the basis flow-through benefit for appreciated deductions by Subchapter S corporations and conservation easement deductions.

Johnson proposed that the popular IRA Charitable Rollover should be continued but that it should be counted in the 50% of adjusted gross income contribution limit.

Editor's Note: Sen. Baucus has indicated that he believes the tax extenders, including the IRA Charitable Rollover, will be passed by the end of November. If this occurs, the effective date for the IRA Charitable Rollover and other provisions is likely to be January 1, 2012. The good news is that the IRA Charitable Rollover seems to be on the safe list. The challenge is that while both Chairman Baucus and Ranking Member Hatch are quite positive toward philanthropy, many of the 154 tax extenders will not be in the final 2013 tax bill. All friends of philanthropy need to support the charitable tax extenders.