Reform Panel Recommendations Include Provisions on Charitable Giving, Tuition Benefits, and Nonprofit Governance
November 2, 2005
President Bush's advisory panel on federal tax reform submitted its final report to Treasury Secretary John Snow on November 1. The nine-member panel, led by former Senators Connie Mack (R-FL) and John Breaux (D-LA), recommended two tax reform options: a "simplified income tax plan" and a "growth and investment tax plan." Under both options, the panel recommended tax changes affecting education, charitable giving, and tax-exempt organizations.
The panel's report will serve as the starting point for Treasury recommendations to the president on tax reform, which could be developed by the end of the year. The president could unveil a specific tax reform plan in his State of the Union address in January. Meanwhile, the House Ways and Means and Senate Finance Committees are expected to hold hearings on the tax reform panel's report.
Following is a summary of the panel's recommendations on education, charitable giving, and tax-exempt organizations.
- Replace the current education credits (i.e., Hope and Lifetime Learning credits) and deductions with a full Family Credit allowance of $1,500 for all families with full-time students age 20 and under.
- Replace education savings plans (i.e., Coverdell education savings accounts, Section 529 plans, and qualified tuition plans) and other non-retirement savings plans with Roth IRA-type "Save for Family" accounts. Taxpayers could contribute up to $10,000 annually on an after-tax basis and earnings would be tax-free. Tax-free withdrawals would be allowed at any time to pay for qualified health or medical costs, education or training expenses, and purchases of a primary residence. Taxpayers would be able to withdraw up to $1,000 tax-free each year for any reason. Distributions in excess of $1,000 that are not for qualified expenditures would be treated as taxable income and would be subject to an additional 10 percent tax. Funds would be available tax-free at any time to taxpayers who are 58 or older. No minimum required distribution rules would apply. Existing education plans could be converted to Save for Family accounts. Existing accounts that are not converted would continue, but all new contributions would be made to Save for Family accounts. Low-income taxpayers could contribute a new refundable "saver's credit" up to $500 per person (25 percent of $2,000 annual contribution limit).
- Eliminate most tax-free fringe benefits, including the exclusion for employer-provided educational assistance and college and university tuition remission.
- Allow all taxpayers (i.e., itemizers and non-itemizers) to deduct charitable contributions exceeding 1 percent of income.
- Allow taxpayers over age 65 to make tax-free gifts from their traditional IRAs directly to qualified charities.
- Require charities to report large gifts (i.e., donors whose total annual contributions to a charity in the amount of $600 or higher) directly to the IRS and to the taxpayer. The $600 threshold is consistent with the current-law information reporting thresholds for mortgage interest and trade or business payments. All cash and non-cash contributions of $250 or more would count toward the $600 threshold. Small charities would be exempt from the information reporting requirements if they had 1) more than 250 contributions of $600 or more, or 2) total contributions of more than $150,000. Taxpayers would not be required to substantiate contributions for which the charity reported to the taxpayer and the IRS.
- Allow taxpayers to sell property without recognizing gain and receive a full charitable deduction if the entire sales proceeds are donated to a charity within 60 days of the sale. This rule would apply to the same extent that the property would be eligible for a charitable contribution deduction equal to fair market value under current law (other than items of personal property that are eligible because they are related to the charity's purpose or function). The donor of the proceeds would not be required to pay capital gains taxes on the appreciation of the property. The charitable contribution deduction would be available to the extent that the donor's total contributions exceed the 1 percent of income threshold. To be eligible, the sale of property would need to be an arm's-length sale to an unrelated party.
Valuation of Gifts of Property
- Provide new rules requiring that appraisals be prepared by a qualified appraiser in accordance with generally accepted and customary appraisal standards; specifying that fair market value is the price that would be received if the property were sold in the appropriate market. For a taxpayer or charity selling property, this would generally be the price received from selling to a dealer or other private party. Standards for appraisers would be imposed to ensure that appraisers have achieved a minimum level of certification or education, have not been barred from practice, are independent and unrelated to the donor or donee, and do not have an interest in the outcome of an appraisal.
- Require appraisers to report the value of the contributed property directly to the IRS, the donor, and the charity. The charity would use the appraiser's valuation as the basis for information reporting.
- Impose new penalties on appraisers who misstate the value of property by more than 50 percent. The penalty would be imposed as a percentage of the valuation overstatement up to a maximum penalty.
- Allow deductions for contributions of used clothing and household items only when the taxpayer receives a price list and an itemized receipt from the charity.
Oversight and Governance of Exempt Organization
- Congress should review the types of organizations that qualify for tax-exempt status.
- Congress should review the standards for qualifying and maintaining status as a charitable organization.
- Effective action should be taken to ensure greater oversight and better governance of exempt organizations; however, there are no specific recommendations for changes to rules governing exempt organizations.
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