2005 Tax Reconciliation Summary of the Senate Finance Committee and House Ways and Means Bills

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November  18, 2005

Both the Senate Finance Committee and the House Ways and Means Committee approved separate bills this week extending several tax cuts. While both bills include popular tax-cut extensions that have received bipartisan support in the past, there are major differences between the measures.

For example, the Ways and Means bill extends for two years the reduced tax rates on capital gains and dividends, currently scheduled to expire at the end of 2008. The Senate bill does not extend the reduced rates. 

The Senate bill would extend for four years the above-the-line deduction for higher education expenses, which expires at the end of this year. The Ways and Means bill only extends the deduction for two years.

The Senate bill also includes a second round of tax relief in response to the recent hurricanes, which the Ways and Means Committee introduced as separate legislation.

Conservative finance committee members are confident they will be able to get the reduced capital gains and dividends rates added back into a conference report. However, the differences between the bills could set up a difficult conference between the two chambers, as lawmakers attempt to fit all of their favored provisions into a bill that is required by the Senate’s “pay-as-you-go” rule to cost less than $60 billion over five years.

Senate Finance Committee. The Senate Finance Committee approved a five-year, $60 billion net tax-cut "reconciliation" bill after adopting several amendments, including a chairman's modification proposed by Committee Chairman Charles Grassley (R-Iowa). Ranking Member Max Baucus (D-Mont.) and Senators Blanche Lincoln (D-Ark.) and Charles Schumer (D-N.Y.) joined all 11 committee Republicans in voting to approve the bill.
 
The Tax Relief Act of 2005 (S 2020) would extend expiring individual and business tax incentives and provide additional hurricane tax relief and charitable giving incentives. The bill includes the following provisions that affect or could affect colleges and universities:

• Provide a charitable contribution deduction for non-itemizers. The bill creates a floor of $210 for single filers ($420 for joint filers) that applies to itemizers and non-itemizers. Only amounts in excess of this floor are deductible. The new deduction is not subject to an income cap. This provision would be in effect for tax years 2006-07.
• Allow tax-free distributions from IRAs for charitable purposes. The taxpayer must have reached age 70-1/2 for contributions made directly to a charitable organization and age 59-1/2 for contributions to a split-interest entity. The provision also modifies the return requirements for certain trusts. This provision would be in effect for tax years 2006-07.
• Require 990-T disclosure and certification relating to UBIT. This provision makes Form 990-T available for public inspection, and the current disclosure requirements and penalties that apply to Form 990 are extended to Form 990-T. Additionally, the provision requires a charitable organization that has annual gross revenues or assets of at least $10 million to include with its Form 990 and 990-T a certification by an independent auditor or independent counsel that the organization’s filings accurately reflect its UBIT.  If the certifying party has provided a tax opinion regarding the organization’s UBIT, the certification must include a description of the material facts that were the subject of the opinion.
• Increase the amount of excise taxes imposed on public charities, social welfare organizations, and private foundations. This provision doubles the dollar limitation on organization managers for participation in an excess benefit transaction from $10,000 per transaction to $20,000.
• Improve accountability of donor-advised funds. The bill requires that sponsoring organizations of donor-advised funds make a distribution equal to 5 percent of the aggregate asset balance of all donor-advised funds maintained by the sponsoring organization during the taxable year. The provision allows the use of set-asides (e.g., saving money for a building) and permits them to count toward the payout requirement.
• Modify rules relating to supporting organizations. The bill enhances rules relating to Types I, II, and III supporting organizations, with a focus on transparency of transactions between the supporting organization and the supported organization. Supporting organizations must generally pay each taxable year to one or more public charities the sum of 1) the greater of 85 percent of its income or 5 percent of the aggregate fair market value of all of the assets of the organization (other than those used directly in supporting charitable programs), and 2) any repayments of amounts that were taken into account as support provided by the supporting organization in prior years. New supporting organizations may not support more than five organizations. Anti-abuse provisions apply to supporting organizations that support an organization that a donor controls.
• Expand Hope and Lifetime Learning Credits for students in Gulf Recovery Zone. This measure expands the eligibility of qualified expenses to include room and board. For students enrolled and paying tuition at an eligible educational institution located in the Gulf Recovery Zone, the provision also increases the Hope credit to a maximum $3,000 per student and the Lifetime Learning credit rate from 20 percent to 40 percent.
• Impose penalties for involvement by an exempt organization in tax-shelter transactions. The bill subjects exempt organizations to penalties for participating in a prohibited tax-shelter transaction, or what is known as a “listed” or “reportable transaction” (as determined by the Treasury Secretary), as accommodating parties.
• Limit charitable contributions of clothing and household items and increase substantiation required for charitable contributions (receipts for all cash gifts; lower $250 substantiation threshold to $100).  The Treasury Secretary is required to publish an itemized list of clothing and household items and assign a value to each item. Any deduction for a charitable donation of such items may not exceed their assigned amounts. If the item is not in “good condition,” the donor would be limited to a deduction equal to 20 percent of the list value. Contributions for which the taxpayer gets an appraisal are not subject to the proposal. For contributions of clothing or household items with a claimed value of more than $500, the taxpayer may elect to use the amount received by the charity from sale of the item rather than the list value. 
• Increase penalties on taxpayers and appraiser on overstatements of the value of donated property, including substantial and gross overstatements of valuations of charitable deduction property and penalty on appraisers whose appraisals result in substantial or gross valuation misstatements. The provision also provides a definition of qualified appraisers and appraisals.
  

Ways and Means Committee. The House Ways and Means Committee voted 24 to 15 along party lines to approve a five-year, $57 billion net tax-cut reconciliation bill after adopting several amendments. The Tax Relief Extension Reconciliation Act of 2005 (HR 4297) would extend several expiring individual and business tax incentives, including higher education tax incentives.

  As approved by the committee, HR 4297 includes provisions to:

• Extend the above-the-line deduction for higher education expenses for two years (for tax years 2006 and 2007). The provision was added by an amendment offered by Rep. Phil English (R-Penn.).
• Extend the reduced rates on capital gains and dividend income for two years through 2010.

Although the congressional budget authorizes a net tax cut up to $70 billion over five years, Chairman Thomas said the Ways and Means bill was designed to comply with Senate budget rules that effectively limit the net tax-cut amount to $60 billion over five years. This amount will increase to $70 billion once a conference report on a mandatory spending cut reconciliation bill is filed.