Legislative Affairs Updates

At the January 10, 2023, PPGC members’ meeting, I discussed some year end surprises in new legislation commonly known as “SECURE 2.0”, a part of the Consolidated Appropriations Act of 2023. While many CAA provisions affect retirement plans, a few affect charitable giving. This legislation was signed into law by President Biden on December 29, 2022.

The provisions affecting charitable giving are generally effective January 1, 2023, and a brief summary was given at the PPGC meeting as follows:

• The definition of qualified charitable distributions (“QCDs”, or commonly known as IRA charitable rollovers) was expanded to allow QCDs to be paid into charitable gift annuities (“CGAs”) and charitable remainder trusts (“CRTs”). The amount is limited to a maximum of $50,000, must be completed in a single year and can be made only once during the lifetime of the IRA owner.
• Starting in 2024, the $100,000 annual limit on QCDs is indexed for inflation.
• Within the SECURE 2.0 retirement provisions, the current age for making required minimum distributions is changed to 73 in 2023 and 75 in 2033. This change does not affect the QCD eligibility age of 70½.
• No change was made to restore the universal charitable deduction for non-itemizers.
• Finally, QCDs still cannot be made to donor advised funds at community foundations.

These changes are not perfect but a good start. Hopefully, Congress will act to expand the IRA charitable rollover even further in the future.

As with almost all tax law, there are a few quirks and potential pitfalls, including:

• All payments made from a CGA or CRT funded with a $50,000 QCD must be fully taxable. This is generally the case with CRT payments, but is an important difference for a CGA.
• A $50,000 QCD can only be made to a CRT or CGA funded with IRA assets. So existing trusts cannot receive QCDs from IRAs, and only new CRTs will qualify.
• The statute also says that CGA payments attributable to a QCD must be at least 5%. This differs from current CGA rules which base payments on age and may be less than 5%.
• Deferred CGAs cannot be used as payments must begin within one year of the date of funding.
• Multiple life payments are limited to the IRA owner and their spouse.

The $50,000 one-time limit in Secure 2.0 is quite low for CRTs, and may be below the required minimum in the planned giving policies of many charities and below the acceptable minimums of corporate trustees. An unanswered question is whether a donor and spouse can each fund the same CRT with a one-time $50,000 QCD from each of them. A $100,000 CRT is much more attractive to a corporate trustee and is usually at or above the minimums in many planned giving policies.

As always, the devil is in the details. While the expansions to the IRA charitable rollover are welcome, they come with complications.

Please do not hesitate to contact any PPGC Board member if you have any questions on the above changes or any other matter related to charitable organizations.

At the July 26, 2022 PPGC member meeting, I discussed a recent Tax Court case where a donor lost a $400K plus charitable tax deduction. In Albrecht v. Commissioner, TC Memo 2022-53, the taxpayer donated Native American jewelry and artifacts to the Wheelwright Museum of the American Indian. The IRS challenged her deduction because the “contemporaneous written acknowledgement” required by the tax law substantiation rules did not have the magic language that she did not receive any goods or services in return for her donation. The Tax Court agreed with the IRS and disallowed her charitable deduction finding that she had not received the legally required acknowledgement before filing her tax return. In reaching its decision, the Tax Court followed the IRS in a strict reading of the applicable statute. The case has been appealed.

As this case demonstrates, it is critical for all charities to review their acknowledgement letters to be sure they follow the letter of the law. It is impossible to tell from the facts of the case how or why the Museum issued an incorrect acknowledgement letter, or whether the Museum tried to correct the mistake. While it is the donor’s responsibility to substantiate his or her deduction by obtaining a correct acknowledgement letter, most donors (including myself) rely on the good faith of the charitable donee to provide the acknowledgement letter. I would imagine that the taxpayer was none too happy with the donee Museum for helping her to lose a $400K plus charitable deduction. The Albrecht case demonstrates the importance of carefully following the charitable deduction substantiation rules.

Please do not hesitate to contact any PPGC Board member if you have any questions on this subject or other matters related to your charitable organization.

At this time, charities should be aware of potential new developments that may affect their donors and themselves. This is especially true at the start of the new Biden Administration.

I will list, in no particular order, some updates and potential Biden Administration tax / estate tax priorities (which must of course be passed by Congress before becoming law):

• There were no major tax increases in the recent American Rescue Plan Act of 2021 (the most recent COVID-19 package, signed March 11, 2021).
• Tax increases on individuals, including ordinary income rates, capital gains and investment income rates, especially for higher-earning taxpayers.
• Repeal or modification of “stepped up basis” for transfers at death.
• A wealth tax that taxes dividends and capital gains at ordinary income tax rates, and requires certain taxpayers to pay an annual tax on net unrealized gains (gains would not just be taxed upon sale of an asset).
• Reduce the federal gift and estate tax exemption from $11.7 million to a much lower figure, perhaps $3.5 or $5 million.
• Federal estate tax rates might be increased on a graduated scale from 40% to as much as 77% on large estates.
• Eliminate / limit certain discounting techniques such as discounts for a minority interest and lack of marketability. Also discounting techniques such as grantor retained annuity trusts (“GRATs”), charitable lead trusts (“CLTs”) and charitable remainder trusts (“CRTs”) could be limited.
• Limit the generation skipping exemption to a specific term of years, maybe 50 – 90 years, with tax payable at the end of such term.
• Reduce the current annual exclusion from the gift tax from $15,000 per donee to as little as $20,000 - $50,000 by capping the total for all donees.
• Capping the benefit of itemized tax deductions (28% benefit only), and the elimination of up to 80% of the deductions of upper income taxpayers (restore PEASE limits for income over $400,000).
• Broaden the 12.4% Social Security tax (currently imposed on compensation up to $142,800) to include income in excess of $400,000.
• Limit the size of IRAs or other retirement accounts, with penalties assessed on amounts exceeding the limits.

Donors and their tax advisors may be wise to take action before these changes can be implemented. Limiting itemized deductions by upper income taxpayers may lead to more giving in 2021 before this change takes effect.

Two other developments to consider:

• The Legacy IRA Act, currently in Senate Bill 243, proposes to allow life income gifts to be funded by IRA Charitable Rollovers (an expansion of current law). The 70.5 age requirement would be lowered to 65 for life income gifts. PPGC and some of our members have contacted our Congressional representatives to support this expansion of the IRA Charitable Rollover. Please contact me or any PPGC Board member if you would like to help in this lobbying effort.
• In a recent case, the PA Commonwealth Court said Allentown, PA could not impose its business privilege tax on a local charity.

Please do not hesitate to contact us if you have any questions on these subjects or other matters related to your charitable organization.

Last year, Congress passed the CARES Act in response to the Covid-19 pandemic. Under the CARES Act, donors who are otherwise not able to itemize deductions in 2020 may be able to take a charitable deduction of up to $300 for cash contributions made in 2020.

The Consolidated Appropriations Act (“CAA”) signed into law on December 27, 2020, has provisions similar to the CARES Act beneficial to certain tax-exempt, charitable organizations permitted to solicit donations. For 2021, the CAA, like the CARES Act, allows a $300 above-the-line deduction for individuals who do not otherwise itemize deductions. A significant change in the CAA from the CARES Act is that the CAA now allows those who are married and filing joint returns to claim an above-the-line deduction of $600 in 2021. The CARES Act included such a deduction to only $300 per tax return filed, thus limiting the amount of the above-the-line deduction for married couples filing a joint return. As a result of the CAA, married couples who file joint returns may consider increasing their 2021 donations made to tax-exempt organizations. Also, the CAA also continues the ability of itemizers to deduct charitable contributions up to 100% of adjusted gross income. Fundraising efforts may wish to highlight these changes to educate taxpayers to increase their charitable giving in 2021.

As with the CARES Act, the CAA also has other provisions which may be of benefit or indirect benefit to tax-exempt organizations. One such provision includes changes to the Paycheck Protection Program, also referred to as PPP. Other provisions include changes to stimulus payments, unemployment compensation and various tax credits. Some of the changes to tax credits include the employee retention credit as well as tax credits for employers offering qualified paid sick and family leave. While these changes may not directly benefit a tax-exempt organization, tax-exempt organizations can make employees, donors and others aware of these tax credits to incentivize donors to support their missions.

Please do not hesitate to contact us if you have any questions on this matter or other matters related to your charitable organization.

As we come upon the end of 2020, charitable organizations should remember the CARES Act passed earlier this year in response to the current pandemic. Donors who may not otherwise be able to itemize their deductions on their 2020 tax return and who donate to qualifying organizations on or before December 31, 2020, are able to take a nonitemizer charitable deduction of up to $300 for cash contributions made in 2020. Qualifying organizations are ones which are religious, charitable, educational, scientific or literary in purpose. Additionally, limits on charitable contributions were suspended under the CARES Act. For example, the CARES Act temporarily raised the limit on cash contributions to public charities from 60% of adjusted gross income to 100%. Reminding donors of this information could help your charitable organization by inspiring donors to support you when they may not otherwise do so.

Given the unusual nature of this year and the outcome of the Presidential election, it is possible that income and capital gains tax rates may be raised in the not too distant future. Given this possibility, and the fact that some donors may have less income in 2020 due to the pandemic, donors may be wise to consider accelerating income into 2020 to take advantage of current low tax rates.

Finally, to the extent that a donor is looking to maximize the value of charitable deductions, a donor could think about “bunching” deductions into 2021, especially if the donor’s income is low in 2020. If a donor normally makes donations in December, the donor could consider bunching some or all of their donations into January 2021 to combine them with other 2021 deductions, thus helping to exceed the standard deduction in 2021. Not only will this technique allow claiming the full charitable deduction in 2021, but the deduction could be worth more in 2021 if the donor is subject to a higher 2021 tax rate.

Please do not hesitate to contact any PPGC Board member, or Jack Owen, if you have any questions on these planning ideas or other matters related to your charitable organization.

As we previously discussed in our June meeting, considerable legislation and regulations have been passed in response to the COVID-19 pandemic, and I reported on the following items at the “virtual” PPGC meeting on September 8, 2020:

1. Surprising Pennsylvania Response to Pandemic and Economic Downturn

On July 23, 2020, Governor Wolf signed into law H. B. 2484, Act 71 of 2020, which permits increased payouts from endowment funds to charities and expands the standing of donors. This legislation was passed in response to pressure from charities to spend more from their endowments after recent economic challenges.

Before this change in the law, Pennsylvania had permitted two types of spending from endowments. The first is under the Principal and Income Act, which permits charities to spend only the actual income earned from an endowment. The other alternative is the Total Return Policy (Act 141), which before the change in law permitted charities an election to spend between 2% to 7% of the three year average value of their endowment as long as consistent with the long term preservation of the endowment. With this recent change in law, charities are now allowed to spend up to 10% of their endowment for a temporary period of three years. Accordingly, for fiscal years ending in 2020, 2021 and 2022, Pennsylvania raised its fixed maximum from 7% to 10% for endowment spending. The spending, however, must consider the long term preservation of the fund and the charity’s need for capital to fulfill its mission. The percentage selected must be done in a prudent manner by the board acting as fiduciaries and applies to the three year average of the balance in the endowment. These rules apply to both nonprofit corporation funds and funds held in separate trusts.

The other major change in Act 71 of 2020 was to expand standing. Under prior law, a donor generally did not have standing to sue a charity for failure to follow endowment restrictions. Following Act 71, a donor now has standing related to his or her donation. Act 71 provides that, in addition to the Attorney General, the charity itself, the donor and any other person named in the gift instrument has standing. For planning purposes, donors may now want to name persons in a gift instrument to enforce the donor’s restrictions after the death of the donor.

Electing a Total Return Policy on endowment spending is something that should be studied carefully by a board of directors (or trustees). Drafting an endowment agreement is also a significant undertaking for a donor, and it is critical for a charity to understand any endowment restrictions.

2. Under the CARES Act, we previously reported that retirement account owners who are age 70.5 and up do not have to take a required minimum distribution (“RMD”) for 2020. IRS has implemented some additional extensions under this legislation. For those who already took RMDs in 2020, IRS Notice 2020-51 provided that they had until August 31, 2020, to roll their distribution back into their retirement account. Under 2020-51, there is also additional relief for elections that were due to be made in 2020 resulting from a retirement account owner who died in 2019. For example, some retirement plans permit employees or beneficiaries to elect whether RMDs are determined under a 5-year rule or a life expectancy rule. Another special extension allows spouses and non-spouse designated beneficiaries of retirement account owners to make the election up until December 31, 2020, for owners who died in 2019.

The COVID response legislation and tax planning are difficult topics. Please do not hesitate to contact any PPGC Board member, or Jack Owen, with any questions.

At the PPGC meeting on January 14, 2020, I reported on the following items:

1. Santa Claus visited nonprofit organizations at the end of last year. With President Trump's signing of the federal government spending bill on December 20, 2020, the legislation repealed the Internal Revenue Code provision requiring transportation fringe benefits such as parking and transit passes to employees to be included in unrelated business taxable income. Repeal of the fringe benefits tax is retroactive for taxes that nonprofits have paid or accrued after December 31, 2017. Nonprofit organizations that paid the tax may apply for a refund, although more information is expected from IRS on the refund process.

Also, the spending bill included a modification to the excise tax applicable to the net investment income of private foundations. The legislation sets a flat rate of 1.39%, effective for tax years beginning after December 20, 2019.

2. Also at the end of last year, the Setting Every Community Up for Retirement Enhancement (Secure Act) was passed as part of a large appropriations bill. The Secure Act includes many provisions designed to facilitate and enhance savings for retirement. The changes were passed by a bipartisan vote in the Senate of 71 to 23 and are helpful for workers who desire to save for retirement. Some of the provisions are helpful to nonprofit organizations and some may not be particularly helpful. Some of the provisions passed which affect nonprofits include:

a. Traditional IRA Contributions. Individuals over 70 1/2 with earned income may continue to make contributions each year. Previously, only Roth IRAs could be funded after age 70 ½.

b. Required Minimum Distribution Age (RMDs). For individuals who turn age 70 1/2 after December 31, 2019, the RMD age is increased to age 72. Those persons who reached age 70 1/2 during 2019 must still start their RMDs under previous law.

c. Stretch IRA Distributions Limited. With the new legislation, inherited IRA s for non-spouse beneficiaries may no longer be distributed over the beneficiaries’ lifetimes. Now, IRA and other qualified plan distributions must be paid out over a maximum term of 10 years. There are exceptions for recipients with disabilities, minors, spouses and individuals who are within 10 years of the age of the IRA owner.

Provisions of the Secure Act generally take effect on January 1, 2020. While the age for RMDs increases to age 72, the qualified charitable rollover provisions remain at age 70 1/2. IRA owners over age 70 1/2 may continue to transfer up to $100,000 each year through a qualified charitable rollover to qualified charities. This transfer may fulfill all are part of an RMD.

3. Unfortunately, the Legacy IRA bill, which allows seniors to make tax-free transfers from IRAs to life-income charitable gifts, was not passed by Congress. Attached is the November 18, 2019 letter sent to Rep. Mike Kelly and a Petition which many PPGC members have signed. If you would like to sign the Petition, please do so and return it to Gordon Fraser (gcf5@pitt.edu) or me. Feel free to contact Rep. Kelly or any other members of Congress on your own.

Please do not hesitate to contact any PPGC board member, or Jack Owen, with any questions.

The bipartisan Legacy IRA Rollover Bill (H.R. 1337) was discussed. This proposed legislation will encourage charitable giving, and expand the existing IRA charitable rollover provisions, by enabling senior citizens to make tax free transfers from IRA's to charities through life-income plans (charitable gift annuities and charitable trusts).

Several items were distributed at the meeting including a petition, a sample letter to Rep. Mike Kelley, an article from the American Council on Gift Annuities and a Cummings & Lockwood LLC article. The letter to Rep. M. Kelley can be modified at your discretion.The Petition was distributed and signed by many PPGC members at the meeting. Anyone else wishing to sign the Petition should be encouraged to do so and return the signatures to Jack Owen by email (jowen@owenlawllc.com). The Petition will be presented to Rep. Kelley by PPGC. Others may also use the Petition for lobbying efforts. Questions may also be directed to Gordon Fraser (gcf5@pitt.edu).

Sample letter to Representative Mike Kelley

American Council on Gift Annuities Article

Two recent cases were discussed regarding charitable substantiation. The first was Blau v. Commissioner (D.C. Court of Appeals, May 24, 2019) where the Court affirmed a Tax Court decision denying a charitable deduction of $33,000,000 because the taxpayer did not include the cost basis and date of acquisition of the donated property on IRS Form 8283. The Court remarked that providing the cost basis is important to IRS when buying the property for approximately $3M and then claiming a charitable deduction of $33M a little more than two years later. The second case discussed was Oliveri v. Commissioner, (Tax Court Memo, May 28, 2019). In this case, the Tax Court denied most of the Taxpayers deductions because they were for personal, rather than charitable expenses, were not properly substantiated, and were not in coordination with or supervised by a charitable organization. Both of these cases show the importance of strict substantiation of charitable contributions in accordance with IRS regulations.

Please do not hesitate to contact a PPGC board member or Jack Owen with any questions on any of these topics.