On February 7, 2002, with the White House’s approval, Senators Lieberman and Santorum announced a compromise bill that would encourage charitable giving by providing individuals and businesses with a variety of tax incentives and by making it easier for smaller, faith-based social service providers to qualify for federal aid. The Charity Aid, Relief, and Empowerment (CARE) Bill of 2002 contains, among other provisions, several temporary tax provisions that would expire after two years. Church treasurers should be familiar with the following provisions in this bill:
- 1. Charitable contribution deduction for nonitemizers. The CARE bill would allow nonitemizers to deduct their charitable contributions up to $400 for single taxpayers ($800 for married taxpayers filing joint returns) during 2002 and 2003. Allowing nonitemizers to deduct charitable contributions would provide an incentive for all taxpayers to give to charity (compared to current law, which only rewards giving by itemizers). Currently, only one-third of taxpayers can deduct their charitable contributions.
- 2. Tax-free distributions from IRAs for charitable purposes. The CARE bill would provide tax-free treatment of distributions made from IRAs for charitable purposes after the beneficiary reaches age 67. Tax-free treatment would apply to distributions made (in 2002 and 2003) directly to charitable organizations or “indirectly” through charitable remainder trusts, pooled income funds, or the purchase of charitable gift annuities. This proposal would encourage donations of otherwise taxable IRA assets to charity, by eliminating the need for taxpayers first to include the taxable amounts in income, and then claim an offsetting charitable contribution deduction. Because not all taxpayers can deduct the full amount of their charitable contributions, current law effectively discourages some taxpayers from donating IRA assets to charity.
- 3. An increase in the percentage limit for corporate charitable contributions. The CARE bill would raise the deduction limit (currently 10% of taxable income) to 13% for 2002 and 15% for 2003. Raising the limit on corporate charitable contributions would provide an incentive for corporations to increase their support for charitable organizations. For 2002-2003, the CARE bill would allow all businesses (not just C corporations) to claim an enhanced deduction for donated food equal to the lesser of fair market value or two times cost.
- 4. Individual Development Accounts. After 2002 and before 2008, the CARE bill would allow up to 900,000 eligible lower income Americans to create “individual development accounts” (IDAs). For each account, the financial institutions sponsoring the IDA program would match up to $500 per year in account-holder contributions. Neither the matching amounts nor earnings on those amounts would be subject to income tax. Withdrawals of these matching amounts and earnings would have to be for higher education expenses, first-time home purchase expenses, and business capitalization expenses. A withdrawal from the main account for other purposes may result in a forfeit of some or all of the matching account. The program would be funded through 2009 by allowing the sponsors both an income tax credit for the matching amounts and an annual $50 per account credit to cover the costs of administration and participant education.
Key point. At the time of publication the President had not signed this bill into law.
This article first appeared in Church Treasurer Alert, April 2002.