Last week, the Protecting Americans from Tax Hikes Act of 2015 (the “PATH Act”) was passed by Congress and signed into law. Included in the Act were 3 charitable giving incentives that had previously expired on January 1, 2015. Rather than simply extending the incentives retroactively for another year, which was the manner in which Congress had passed the incentives for the past several years, the PATH Act made them permanent. The legislation also made permanent the Earned Income Tax Credit and Child Tax Credit, two of our most important and effective anti-poverty tools, and the American Opportunity Tax Credit for college tuition and related expenses.
IRA Charitable Rollover
The IRA Charitable Rollover provision allows individuals aged 70½ and older to donate up to $100,000 from their traditional or Roth IRAs to eligible public charities without having to count such qualified charitable distributions as taxable income. Distributions from IRAs, which are required starting at age 70½, are otherwise typically included in the individual’s adjusted gross income (AGI) and subject to income tax.
Excluded from the IRA charitable rollover provision are distributions to supporting organizations, donor-advised funds, or private foundations and distributions from SEP or SIMPLE IRAs.
Because the qualified charitable distributions aren’t counted in an individual’s AGI, the individual cannot claim an itemized charitable deduction for them. But lowering AGI is generally considered a more valuable tax benefit than the alternative of recognizing taxable income and taking a corresponding charitable deduction because:
■ Medical expenses for seniors are limited to the excess over 10% of AGI
■ Miscellaneous itemized deductions are limited to the excess over 2% of AGI
■ Itemized deductions are generally reduced by 3% of AGI above a threshold
■ Personal exemptions begin to phase out as AGI exceeds a threshold
■ Up to 85% of Social Security income becomes taxable as AGI increases
■ Eligibility for Roth IRA contribution goes away after AGI exceeds a threshold
■ The 3.8% tax on net investment income only applies to AGI above a threshold.
The IRA Charitable Rollover, unlike the charitable contribution deduction, is also available to taxpayers who do not itemize their deductions. This tends to help facilitate contributions from older individuals who have paid off their home mortgages and may no longer itemize deductions.
Analysis of IRA Charitable Rollover Extension (Council on Foundations)
Enhanced Deduction for Food Inventory
The Enhanced Deduction for Food Inventory provision allows taxpayers other than C corporations to receive an enhanced deduction for certain contributions of food inventory. Without the enhanced deduction, such taxpayers would only get a deduction of their basis (e.g., cost) in the inventory even though C corporations would continue to benefit from the enhanced deduction. Generally, the enhanced deduction is equal to the basis of the property contributed plus one half of the appreciation (e.g., profit that would have been recognized if the inventory were sold at its fair market value), not to exceed twice the basis.
According to a coalition of 8 leading nonprofits (Independent Sector, United Way, National Council of Nonprofits, Council on Foundations, Feeding America, Land Trust Alliance, Jewish Federation, Y) in their letter to the Senate Finance Committee (the “Coalition Letter”), this incentive for donating food has translated to a 137 percent increase in the amount of food donated by restaurants to food banks.
Enhanced Deduction for Land Conservation
The Enhanced Deduction for Land Conservation provision allows land owners to reduce their taxable income by giving up development rights to their property (through a conservation easement) for purposes of preserving natural resources. Under prior law, a land owner can deduct the value of a conservation easement, up to 30% of his or her adjusted gross income, for up to six years. The enhanced deduction raises the maximum deduction a land owner can take for donating a conservation easement from 30% of their AGI to 50% (qualified farmers and ranchers can deduct up to 100% of their AGI) and increases the number of years over which the land owner can take deductions from 6 to 16 years.
According to the Coalition Letter, the enhanced deduction for land conservation increased conservation totals by 30 percent, up to one million acres per year.
Income Tax Incentives for Land Conservation (Land Trust Alliance)