The US Congress has managed again to kick every charity in the gut. Let me summarize how they’ve done it first, personalize the issue to my congressional district second, call for action third, and close by sharing a cogent analysis of why matters stand as they do and of what to expect going forward.The so-called “tax extenders” provisions in the IRS code expired on December 31, 2013. Congress is likely to act to renew most, if not all, of them, but the political squabble in Washington introduces uncertainty and prevents timely action. There are 55 such provisions, but I will focus on just one: the IRA charitable rollover provision.
Last year, if you were 70½ years old and had an IRA, you could choose to give up to $100,000 of your IRA to charities. You needed to be sure the charity was legitimate. You could receive no tangible benefit of any kind in return. This was pure charity. You could give to your church or synagogue or the American Cancer Society, the orchestra, a college, or any number of other recipients.
You could use the amount of the gift to reduce your otherwise required minimum distribution (RMD). Many Cumberland clients around the country used this provision to support charities of their choices. We processed many of those gifts.
Now those generous donors await an extension of this special provision. They cannot legally make this gift today even if they want to. Without passage of the IRA charitable rollover provision, such gifts are not permitted by current (2014) law.
Donors could take out the RMD, pay the taxes on the amount, and then give to the charity and take the charitable deduction. Many of them do that anyway. However, they may fall into an income bracket subject to a phase-out of deductions. Our income tax code is so complex that many taxpayers lose the deductions they would otherwise seek. So the IRA gift is often used because it is straightforward. The money goes from IRA to charity, no deduction is taken, and the RMD is lowered by the amount of the donation. The annual limit was (and will be once again if the law is extended) $100,000.
When this provision is in force and a donor makes a charitable donation, who wins? The donor wins if he or she wants to be charitable. The charity wins since it gains needed funds. The government breaks even since it is net neutral and offsets an RMD and deduction. Who loses? No one.
But if the provision is not extended, who wins? No one. The charity doesn’t get the money. The donor/taxpayer waits to give in hopes that the provision will be restored at some point or has less to give because of the tax bite. Some beneficiaries of the charities don’t receive the help they need because the charities no longer have as much cash flow to serve them.
Why don’t charities make a lot of noise about this? Simple. They are forbidden from engaging in politics. The commentary I’m writing here borders on the kind of political activity from which 501(c)(3) charities are restricted. Speaking out would jeopardize their tax-exempt status as nonprofits. So the charities’ advisers tell them to be silent.
But donors do not have to be silent. We are the constituents of congressmen and women who are in a position to extend IRA charitable rollover and other tax provisions. They are supposed to represent us. They could fix this at once.
Is the current holdup a Senate problem or a House problem? Well, it is both. So in my case, as a Florida resident, I could point my finger at Senator Marco Rubio and Senator Bill Nelson and say, why are you failing to help every charity in your state and hundreds or thousands of your constituents who want to support those charities? That is a fair question. How about an answer and some action?
But, in reality, this is tax legislation, so it must originate in the House and not the Senate, according to the US Constitution. The Senate Finance Committee is likely to try to “move forward” a tax extender bill for discussion, according to Strategas Research. They believe that Finance Committee Chair Ron Wyden wants to move this legislation and realizes how it is damaging sections of the US economy.
Jim Lucier of Capital Alpha Partners, a Washington-based consulting firm, agrees that the Senate is favorably disposed to an extender bill. His firm, too, believes such a bill would advance in the Senate if the House were to move on it soon. However, as Lucier says, in response to my query, “The Senate can mark up a proposal, but it cannot send one to the House unless it is replying to a House bill. So all fingers now point to the House of Representatives.”
In my case, my Congressman is Vern Buchanan, so I will take the matter up with him directly, along the lines that follow. Readers may freely change names to their own congressional representatives. The principle is the same.
Vern – I will call you Vern since we have met personally and you like to use the name Vern when you call me on the phone with one of your recorded political messages – in Sarasota there are numerous Sarasota-based and regional charities which received payments from IRAs last year under the IRA charitable rollover provision in the tax code. Our firm has handled a number of them. Among those charities are Sarasota Community Foundation, Westcoast Black Theater Troupe, SPARCC (Safe Place and Rape Crisis Center), New College Foundation, not to forget, Ringling Museum, Red Cross and the Library Foundation.
Vern, those charities are familiar to you. This year they have less money to meet their needs because they are still waiting on you and your House colleagues to extend the provision in the tax code. Since you have previously supported the idea of the IRA charitable rollover, there is no reason to believe that you have changed your mind. Yet you stand in the position, along with your fellow members of Congress, of either thwarting or enabling charitable donations amounting to millions for this tax year.
Now you and your colleagues are out seeking re-election. You want money to support your campaign, and you want votes. Well, charities want money, too — and they have donors and members and supporters who want to give to them. Some of them are in your political base.
You want votes. We want passage of an extension of the IRA charitable rollover provision before the election. You want financial support for your campaign; we want to help the charities of our choice. Take Sarasota’s Safe Place and Rape Crisis Center. What makes anyone think that their clients’ needs stop just because the House of Representatives is locked in political dysfunction? Take the All Faiths Food Bank. Is the hungry going to remain hungry until Congress gets around to passing a bill?
Senators Nelson and Rubio, last time I checked, you were Floridians, too. I know you want the best for donors, charities, and those with whom they partner to serve in this district. I urge you to sponsor and/or support IRA tax-extender legislation.
Jim Lucier’s full text in answer to my inquiry about tax extender legislation follows below. We thank Jim for the time and effort he invested to phrase this analysis.
Hi David,
There are two reasons for slow action on extenders. The first reason is everyone on Capitol Hill thoroughly detests doing "extenders" over and over again. It has gotten to the point that even members of Congress realize that doing an annual extenders bill is silly and embarrassing.
The Senate Finance Committee and the House Ways and Means Committee both made it clear they were not prepared to talk about extenders until they had made progress toward permanent and fundamental tax reform. And it is not as if we haven't had chances to do tax reform: We had opportunities following the Simpson Bowles report, during the debt ceiling crisis of 2011, during the fiscal cliff, and during the last standoff over the debt ceiling.
Ways and Means Chairman David Camp (R-Mich.) has finally put out his tax reform package – which makes important and difficult choices, and which, despite grumbling from many critics, is likely to set the baseline for serious tax reform during the next administration. Once Camp has had the opportunity to hold a few hearings on his plan, we will probably see him turn his attention to extenders. As I mentioned, Senator Wyden will complete an extenders bill over the next few weeks.
It is true that the IRA charitable contribution provision could be extended as a standalone or as part of any appropriate vehicle, but there is another consideration on the House Republican side. This is that, constitutionally, tax bills can originate only in the House. Thus, as long as the House passes no tax bill, the Senate cannot take the initiative in proposing corporate tax hikes to pay for extending unemployment insurance, or reversing the sequester, or funding food stamps, or any other such worthy endeavor.
Fortunately, there is now a budget agreement covering this year and the next. The Senate has indicated that it will not even do a budget of its own for the coming fiscal year. Appropriations for the current fiscal year are settled. Republicans don't seem likely to demand policy concessions on the debt ceiling going forward, unless perhaps they gain a Senate majority in the fall elections. There is probably now less need on the House Republican side to preemptively block tax increases coming from the Senate. However, the clock has also run out on doing much before the elections, and so I don't believe there is any prospect of doing a standalone fix on the IRA provision until after the elections.
I have not been following the IRA provision, so I cannot say for sure if there is no opposition to it. I am not aware of any. It seems reasonably likely to me that the IRA provision could pass with an extenders package in November. However, in the future, as we get closer to tax reform, the trend in policy will be toward limiting retirement savings options for upper income taxpayers, so it is not certain how long this will last. For your clients who are fortunate enough to have the option of making a $100,000 charitable contribution from their IRAs, I would recommend that they do it while they can. We may get it restored retroactively for 2014, and I would not be surprised to see it extended for 2015. But after 2016, all bets are off.
David R. Kotok, Chairman and Chief Investment Officer.
