Charitable incentives at risk

As lawmakers consider how to attack tax reform and debt reduction, the way that charitable gifts and deductions are treated is in the cross hairs. The discussion mostly centers on a change in — or outright elimination of — the tax deduction that households receive for charitable donations of money or property. President Barack Obama is expected to propose a budget for next year that would limit the value of the tax break for itemized deductions, including the deduction for charities, mortgage interest and others, to 28% for households that earn more than $250,000 annually. Such an idea was included in last year's proposal but failed. Another idea included in a draft plan from the bipartisan debt commission would limit the charitable deduction to 2% of a taxpayer's adjusted gross income. The commission failed to come to a consensus. Meanwhile, Sen. Chuck Grassley, D-Iowa, has called for the Senate Finance Committee to look into whether charitable tax incentives should be available only for certain types of giving. In the past, he has questioned whether donations to the athletic departments of universities, for example, should receive the same tax treatment as other nonprofits. “It is disappointing to see that Congress is trying to grab more money from charitably minded people,” said Alan Pratt, founder of Pratt Legacy Advisors. He predicted that the level of giving “might wane if the deduction goes down,” though he doesn't expect that a change would have a major impact on client donations. When he presents wealthy clients with the options of creating a foundation or a donor-advised fund, Mr. Pratt said that he quantifies the tax incentives for them, but what drives their decision is their passion for a cause.

SEEKING TAX EFFICIENCY

Sean Stannard-Stockton, a financial adviser with Ensemble Capital Management, agrees that clients aren't going to abandon their charitable giving if they don't get a deduction. However, those wishing to bestow a gift want to do it in the most tax-efficient way possible, he said. With the uncertainty, Mr. Stannard-Stockton advises making a move sooner rather than later. “For someone who might be on the fence about starting a philanthropic vehicle, knowing there may be changes coming could be good reason to pull forward the deductions into this tax year,” he said. By creating a foundation or donor-advised fund, donors can claim the deduction under current rates and give the money away over time, which is a particularly good strategy if the deduction is cut in the future. Regardless of whether the deduction laws are changed, giving in the coming years could be affected if other expected tax increases come to fruition, a recent survey suggested. About 25% of millionaires surveyed would reduce their philanthropy if taxes increased, according to findings by PNC Wealth Management, which sponsored an online survey of 555 people with investible assets of $1 million or more, excluding real estate. One group watching the Washington tax discussions carefully is the National Council of Nonprofits, whose members depend on charitable donations. In urging Congress to keep the charitable deduction intact, the group points out that nonprofits provide many social services that Americans depend on and the government can't afford to fund alone. “Our message to them is: "We rely on the giving incentive, and you rely on us,'” said David Thompson, the council's vice president for public policy. Nonprofits already are expecting to have their government funding reduced in the coming years as federal spending cuts are enacted to curb the deficit, said Daniel Stid, a partner at philanthropic adviser The Bridgestone Group. Therefore, the incentives that encourage private donations will be- come even more important, he said. It may be too late for one philanthropic incentive. The tax break that allows older people to transfer up to $100,000 tax-free from their individual retirement accounts to charity wasn't renewed for 2012. It could, however, be re-enacted retroactively if Congress and Mr. Obama are so inclined. But if that doesn't happen soon, practically, it won't matter, Mr. Thompson said.

WAIT FOR CONGRESS

If it were made retroactive, the only way that people could take advantage of the incentive would be if they had declined to take an IRA distribution before it went into effect, he said. Such a provision was approved retroactively for 2010 as part of a tax compromise between Congress and Mr. Obama that was approved in mid-December 2010.  Advisers confident that it will come back should tell their clients “not to take the money until Congress acts,” Mr. Thompson said. lskinner@investmentnews.com “It is disappointing to see that Congress is trying to grab more money from charitably minded people. Alan Pratt Founder Pratt Legacy Advisors