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CHARITABLE CONTRIBUTIONS.   Term Paper ID:23800 Click to get this paper

Essay Subject: Tax consequences, changes in tax law & impact on contributions. Major legislation since 1969, substantiation, types of donations, return of property.... More...

9 Pages / 2025 Words 12 sources, 19 Citations, TURABIAN Format $36.00 Return to List of Papers

Paper Abstract: Tax consequences, changes in tax law & impact on contributions. Major legislation since 1969, substantiation, types of donations, return of property. Paper Introduction: Introduction Charitable institutions in the United States evolved as immigrants tried to recreate social institutions similar to those with which they were familiar in their home countries. Typically Western European, schools, hospitals, libraries, churches and cemeteries were among the institutions which early Americans sought to rebuild without government intervention. Many museums were established or endowed in the late nineteenth and early twentieth centuries as memorials to individuals and families (it should be remembered that there was no income tax at that time and thus no income tax deduction for charitable contributions). During the middle and late twentieth centuries, changes were made in the income tax code which effectively subsidized contributions to charitable organizations. These organizations included educational instit Text of the Paper: The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper. Conclusion Museums, archives and other charitable institutions rely on donationsfor their survival. [8]Mark Watson, "Charitable Contribution Substantiation Requirements,"Tax Adviser, June 1996, 334. BibliographyAuten, Gerald, James Cilke and William Randolph. [17]Ibid. Return of Property Nearly all charities accept items which they eventually determine theyeither cannot use or do not want. [5]Ibid. If the taxpayer returns the tickets to themuseum ahead of time (without a refund), he can realize a tax deduction forthe evening. With the recent upswing in the stock market, increasing numbers oftaxpayers have begun donating shares of stocks to museums and similarinstitutions. This isbecause the value of the meal is not tax deductible if the taxpayerattends, but the entire ticket is tax deductible if he does not and hereturns the ticket prior to the event. If the shares have been held for less than one year,only the purchase price is deductible. "Charitable Contribution Substantiation Requirements." Tax Adviser, June 1996, 333-335.Wilhem, Eileen and Martin Wolman. The taxpayer can only deduct the lesser of the fair marketvalue (determined by the auction price) or what the taxpayer originallypaid for the item. The relationship between these two provisions meant that TRA 86increased the incentive to make contributions of appreciated property inmodest amounts, but decreased the incentive to make large contributions.Overall, TRA 86 also lowered income taxes for many individuals, whichincreased their ability to make contributions from after-tax income andthus increased overall donations.[6] Today, individuals can deduct up to3 percent or 5 percent of their adjusted gross income (depending on thetype of gift), with a five-year carryover for any excess.[7] Substantiation Since January 1991, all contributions of $25 or more, whether in cashor property, require that the donor receive a written acknowledgment fromthe recipient of the donation. [6]Ibid., 269. Despite recent changes in the taxenvironment which make substantiation and valuation more stringent, thisremains a popular way for individuals to support cultural institutions. [16]William Olcott, "Charitable Giving on the Rise," Fund RaisingManagement, July 1995, 8. This makes it difficult for charities to plan their budgets, andcan be particularly troublesome for institutions such as museums which aretrying to coordinate acquisition activities with operating demands.[15] Overall, charitable contributions increased during the early 199 s,with contributions totaling approximately $13 billion in 1994, an increaseof 3.6 percent from 1993. "Charitable Giving on the Rise." Fund Raising Management, July 1995, 8-9.Peale, Cliff. "State Funding and Giving to the Arts Increased in 1994." Back Stage, June 2, 1995, 1, 14.Hopkins, Bruce. The Tax Reform Act of 1969 Charitable trusts and private foundations became popular havens forthose seeking tax relief once the income tax laws were established, butperceived abuses of these institutions led to the changes in 1969. Typically Western European, schools,hospitals, libraries, churches and cemeteries were among the institutionswhich early Americans sought to rebuild without government intervention.[1] Many museums were established or endowed in the late nineteenth and earlytwentieth centuries as memorials to individuals and families (it should beremembered that there was no income tax at that time and thus no income taxdeduction for charitable contributions). Themost noted effect of the 1969 changes was the proliferation ofprofessionally managed trusts and foundations which are able to handle thecomplex tax and reporting rules now applicable.[2] The Tax Reform Act of 1969 came about after years of congressionaldebate and scrutiny. There issome relief in that no particular form is required for the acknowledgment,and computer-generated forms are often used. Thus a $1 ticket with a $45dinner returns a deduction of $1 if the taxpayer does not attend, butonly $65 if he is able to make an appearance.[11] It should be noted thatthis tax deduction extends to fund raising events, not activities such asraffles or bingo, where the donations are not tax deductible. [7]Conrad Teitell, "What Happens to Taxes When a Charity Returns aGift," Trusts & Estates, July 1995, 63. Underthe act, new statutory definitions sought to distinguish privatefoundations from public charities, excise taxes were raised on certainfoundation activities, and new tools for the IRS were authorized to gaininformation about private foundations and public charities.[3] The Economic Recovery Tax Act of 1981 The Economic Recovery Tax Act of 1981 (ERTA) reduced individual incometax rates by approximately 23 percent over a four-year period; thiseffectively reduced the tax subsidy for charitable contributions. For example, a taxpayer might purchase tickets to abenefit dinner for a museum, and be called out of town during the time thebenefit is to take place. During the middle and late twentieth centuries, changes were made inthe income tax code which effectively subsidized contributions tocharitable organizations. When the tax environment favors suchgifts, charitable donations increase. "What the New Tax Law Means to Fund Raisers." Fund Raising Management, November 1993, 48-5 .Joseph, James A. In 1993, this was the situation asthere was general apprehension about refinements to the tax code and itseffect on wealthy individuals and corporations. [13]Teitell, 63. "The Effects of Tax Reform on Charitable Contributions." National Tax Journal, September 1992, 267-29 .Dougherty, Jim. [19]Jim Dougherty, "IRS Announces New Procedure for Art EvaluationPrior to Filing for Contribution," Tax Adviser, March 1996, 141. The advantage to thetaxpayer of using this statement is that the taxpayer can rely on thestatement of value when reporting the transfer of art, whether the taxpayeris receiving the art, or donating it to a charity. Further, periodicacknowledgments which include the required information for eachcontribution of $25 or more made during a specific period may also beused; this lessens the burden on the charitable organization.[9] Types of Donations Some taxpayers help out their favorite cultural institutions bydonating items for use at charity auctions. Most of the regulations which now govern foundations came about asa result of this act, which led not to a long-term conflict between thegovernment and foundations, but instead to an evolving partnership. While individuals have many differentmotives for supporting charitable organizations, the tax subsidy iscertainly one motivating factor. The acknowledgment must also indicate whether the receivingorganization provided goods or services in return for the contribution andalso include a good faith estimate of the value of these goods or services. However, the capital gain portion of contributions of appreciatedproperty was included as a preference item under the Alternative MinimumTax (AMT). While the tax rules aresimilar as for items donated to a collection, auction items have specialrules, as well. Thus some taxpayersdelayed their donations until 1993 in order to realize greater taxbenefits. [18]Amy Hersh, "State Funding and Giving to the Arts Increased in1994," Back Stage, June 2, 1995, 1. [2]Ibid. Joseph, "Foundations: Building a New Era for OrganizedPhilanthropy," Fund Raising Management, April 1989, 43. During 1994, individuals gave the largest amount($114 billion), with bequests, foundations and corporations each givingless than $1 billion ($8.7 billion, $9.91 billion and $6.11 billion,respectively).[16] Thus while corporations have "deeper pockets" andtypically give larger amounts than individuals, the overall effect is smallwhen compared to the effect of individual contributors. When thestock pays dividends, it may be held as a way to increase the institution'soperating funds on a long-term basis.[12] When stock is given to an organization, the full current market valueof the stock is used for the deduction if the shares have been held formore than one year. This double benefit comes about because there are no capitalgains taxes on the donation and the full market price is deductible. In fact, this strategy typically yields a larger taxdeduction than if the taxpayer were to actually attend the dinner. Another advantage of donating stocks is that no expert writtenappraisal for donations of publicly traded securities is needed, whichsimplifies the transaction. As a result, charitablecontributions increased and institutions were able to take advantage of thesituation.[14] However, the same taxpayers which gave generously in 1993 might havebeen unlikely to give as much in 1992 because they anticipated the changesin the tax code. This type of donation results in alarger donation to the charity, and a larger tax deduction for thetaxpayer. The act significantly altered the body of law whichhad been enacted over the years to regulate public and private charities,and came about from years of suspicion, mistrust and isolated cases ofabuse. "Foundations: Building a New Era for Organized Philanthropy." Fund Raising Management, April 1989, 42-46.Kley, Carolyn, George Schmelzle and Ira Greenberg, "Maximizing the Tax Advantageous of Charitable Giving." Michigan CPA, Fall 1994, 26-27.Olcott, William. Nearly one-half of all charitable contributions go to religiousorganizations, with arts and humanities organizations receiving $9.7billion in 1994, an increase of 1.2 percent over 1993; contributions tothis segment increased 2.6 percent in 1993 over 1992.[17] While tax law isnot the only reason that individuals contribute to charitableorganizations, the tax benefits that are realized, and the changes in taxlaw which favor such giving, definitely affect the level of giving in anyparticular year.[18] Outlook In early 1996, the Internal Revenue Service announced a procedure bywhich taxpayers can request a statement of value used to substantiate thevalue of art for income, estate or gift tax purposes. [11]Ibid. Introduction Charitable institutions in the United States evolved as immigrantstried to recreate social institutions similar to those with which they werefamiliar in their home countries. [19] This statement ofvalue indicates that the tax laws regarding charitable contributions arelikely to get more complicated, not less, in the near future, butcharitable contributions are likely to remain a favorite way forindividuals and corporations to continue to minimize their tax liability. [14]Cliff Peale, "Charity Donations Rise with '93 Taxes," CincinnatiBusiness Courier, March 22, 1993, 25. For example, if a corporation's tax rate increased from33 to 4 percent from 1992 to 1993, a $1 , donation to a local museumwould be worth $3333 in 1993, but worth $4 in 1993. At thesame time, ERTA provided an off-setting increase in the incentive forcharitable contributions by allowing a deduction for such contributions bythose individuals who did not itemize their deductions; this provision waslater rescinded and such taxpayers would no longer be able to takeadvantage of this option. While good-sized institutions areable to meet this requirement more easily than smaller institutions, itposes a burden to all institutions that previously did not exist. This acknowledgment must be received prior to the donor filing the incometax return, or at least prior to the date that the return is due to befiled in order to be considered valid.[8] The substantiation requirements have resulted in increased resourcesbeing used by recipient organizations in order to provide their donors withthe proper documentation for donations. In some cases, the stock is sold by the institution to raisecapital; in other situations, the stock is held as an asset. The tax incentive forcontributions (cash or noncash) was lowered as the marginal income taxrates were lowered for both individuals and corporations. This prevents the taxpayer from reaping the benefit ofthe current market value of the item and so may prevent some donations whentax benefits are the primary motive for the donation.[1 ] Aside from direct contributions of cash or items for collections,there are other types of contributions which taxpayers can make and use astax deductions. [4] The Deficit Reduction Act of 1984 The Deficit Reduction Act of 1984 (DEFRA) tightened complianceprovisions for charitable contributions by requiring signed writtenappraisals for contributions of property worth more than $5, (except forpublicly traded stocks). This provision appliesto items appraised at $5 , or more, although the IRS will issue astatement of value for items with lower appraisals so long as thetaxpayer's request includes at least one item worth $5 , . However, the act also increased the limitation oncertain contributions to private foundations from 2 percent to 3 percentof adjusted gross income.[5] The Tax Reform Act of 1986 The Tax Reform Act of 1986 (TRA 86) brought with it a number ofsubstantial changes to charitable contributions. [3]James A. These organizations included educationalinstitutions, archives, museums, health organizations and similar groups,and the tax subsidies provide strong incentive to businesses andindividuals for making such contributions. This acknowledgment must be sufficient tosubstantiate the amount of the donation, and typically includes the amountof cash paid (where applicable) and a description of property other thancash. When the public anticipates a general increase in the overalltax rate, charitable contributions increase as a way to help minimize thetax liability that taxpayers face. In these situations, the items aresometimes auctioned off as part of a fund raising effort, or they may bereturned to the taxpayer. While this type of situationarises only occasionally, there can be serious ramifications for taxpayers,particularly those who find themselves in higher tax brackets in thefuture.[13] Effect of Tax Law on Charitable Contributions Changes in the tax law result in changes in contributions tocharities. Ifthe taxpayer sells the shares and donates the selling price to the charity,the tax benefit to the taxpayer decreases by the amount of the capitalgains tax. Two other provisions of TRA 86 affected charitable contributions:changes in capital gains tax rates and how contributions of appreciatedproperty were handled with regard to capital gains. "Charitable Giving Remains an Advantageous Option." Trusts & Estates, September 1995, 33-35.----------------------- [1]Eileen Wilhem and Martin Wolman, "Charitable Giving Remains anAdvantageous Option," Trusts & Estates, September 1995, 33. "Five Ways to Help a Charity and Lower Your Income Tax." Money, December 1995, 165-166.Teitell, Conrad. [15]Ibid. Up to threeitems can be declared on one statement of value for a fee of $2,5 ;additional items can be included for $25 each. [4]Gerald Auten, James Cilke and William Randolph, "The Effects of TaxReform on Charitable Contributions," National Tax Journal, September 1992,268. "IRS Announces New Procedure for Art Evaluation Prior to Filing for Contribution." Tax Adviser, March 1996, 141.Hersh, Amy. This research examines the taxconsequences of charitable contributions, including some of the significantchanges in the tax environment of the last 3 years. [12]Carolyn Kley, George Schmelzle and Ira Greenberg, "Maximizing theTax Advantages of Charitable Giving," Michigan CPA, Fall 1994, 26. [1 ]Mary Sprouse, "Five Ways to Help a Charity and Lower Your IncomeTax," Money, December 1995, 165. "Charity Donations Rise With '93 Taxes." Cincinnati Business Courier, March 22, 1993, 25.Sprouse, Mary. Capital gains taxrates were increased by eliminating the exclusion for long-term capitalgains. "What Happens to Taxes When a Charity Returns a Gift." Trusts & Estates, July 1995, 63-65.Watson, Mark. [9]Bruce Hopkins, "What the New Tax Law Means to Fund Raisers," FundRaising Management, November 1993, 49. The tax code requires that the returned propertybe included as income in the year in which the property is returned; theextent to which it must be included as income is limited to the amountdeducted in the year when the donation was originally made and when thetaxpayer initially realized the tax benefit. In some cases, the donations take the form of itemswhich may be included in the institution's collections; in other cases, thedonations include cash or items which can be sold in order to raise fundsfor acquisition or operations. In addition, TRA86 reduced the number of taxpayers who itemized deductions (the experimentfrom the early 198 s allowing charitable contributions for non-itemizershad expired) by increasing the standard deduction. If this paper is not what you are looking for, you can search again: Search for: or Click here to request an essay written just for you.