The Charitable Giving Deduction and Churches

The tax deductibility of gifts to churches and other charities continues to be an issue of high interest on Capitol Hill. In the 2012 Presidential race, both candidates proposed capping the charitable deduction—so this is hardly a partisan issue.

Even though supporters of churches are generally more committed to make charitable gifts as compared with those who give for other charitable purposes, any reduction in giving incentives would not be good news for churches.

The recent hearings conducted by the House Ways and Means Committee provided more evidence of the interest of Congress in tax deductions claimed by those making charitable gifts. Forty-three representatives of nonprofit organizations made their way to the Hill on Valentine’s Day to share their ideas on this issue.

Some of the positions shared with the Committee but those presenting testimony:

• Non-itemizers. Presently those who do not itemize deductions on Schedule A do not receive a charitable deduction benefit. There was some sentiment expressed for expanding access to the deduction.

• Charitable deduction floor. For those who currently itemize their deductions, charitable gifts are deductible from the first dollar given. Here is how a charitable deduction floor would work: Only gifts above a certain dollar floor, let’s say $100, would be deductible. So, ever itemizer would “lose” a deduction for the first $100 they give each year.

• IRA rollover. The Individual Retirement Account (IRA) rollover is a provision givers have enjoyed for a number of years—but it is not a permanent provision in the tax law. The benefits must be extended from year to year. Conrad Teitell, noted charitable tax attorney, urged Congress to make permanent the provision that allows direct tax-free distributions from IRAs to charity. Unless Congress acts to extend the provision, it expires at the end of 2013.

What may come from the current debate about the charitable deduction? Only the Lord knows—literally—but while it is unlikely we will see the charitable deduction disappear, it is very possible that changes will be made as a part of tax reform, resulting in a reduction of incentives to make charitable contributions.

In Mr. Teitell’s recent testimony before the Committee, he warned against tinkering with the current charitable giving deduction. He said we should beware of salami tactics which Congress might use with respect to the charitable giving deduction. The term “salami tactics” was coined by Matyas Rakosi, a Hungarian politician in the 1950s. Matyas said:

If your opponent has a salami and you want it for your very own, you must not grab it — because he will defend it. Instead take for yourself a small slice and he will not notice it. Or, if he does, he will not mind very much. And then you take another slice, and then another slice. And slowly but surely, that salami will pass from his possession into yours.

So it could be with the charitable tax incentives — a slice here and a slice there. Caps can be lowered, floors raised and credits reduced. And before you know it our nation’s unique tax encouragement to charitable giving would disappear.

In the light of the discussions about reducing charitable gift incentives, what should churches do? Here are just a few of the basics:

• Inform congregants to take advantage of the current charitable giving incentives:

• Gifts of cash (and checks). Cash gifts to churches are deductible up to 50 percent of a taxpayer’s adjusted gross income.

• Gifts of stock. Gifts of publicly held stock to churches that has been held 12 months or longer are deductible up to 30 percent of a taxpayer’s adjusted gross income.

• Gifts of real estate. Gifts of real estate that has been held 12 months of longer are deductible up to 30 percent of a taxpayer’s adjusted gross income.

• Rollovers from Individual Retirement Accounts (IRAs). An individual age 70-1/2 or older can make outright charitable gifts from an IRA—including required minimum distributions—of up to $100,000 to a church (or other public charities) and not have to report the IRA distributions as taxable income on his or her federal income tax return. A charitable deduction is not allowable for the amount transferred to charity from an IRA, but the donor is not taxable on the amount transferred. Not being taxable on income that would otherwise be taxable is the equivalent of a charitable deduction. This benefit is available even if the taxpayer does not itemize his or her deductions.

• Encourage generosity toward God. If Christians use the charitable deduction as a basis to support their church they are acting more like the rest of our culture. Generosity toward God should not be not dependent on a charitable tax deduction.

As my friend Wes Willmer says, “Scripture consistently reminds us that if Christ is not first in the use of our money, He is not first in our lives. Our use of possessions demonstrates materially our spiritual status. Is it possible that our checkbooks are a better measure of our spiritual condition than the underlining in our Bibles?”
 

Since God owns it all (and He has no lack of resources), we must steward our resources to edify the body of Christ. Regardless of what happens with charitable giving incentives may our hearts be drawn closer to God and the priorities of His Kingdom!

 

Then and Now

“If ECFA had not been formed, another organization would have been needed to fill its role,” said Lauren Libby, ECFA board member and TWR president.

Still, questions are sometimes asked, such as  “Where would we be if there were no ECFA?”;  “Why ECFA?”; and  “Why does ECFA get to set biblically-based standards for churches in the areas of sound governance, financial oversight and accountability, and stewardship practices?”

To answer these questions, it is helpful to take a brief look at history. Thirty-four years ago, there was no evangelical organization setting standards for sound governance, financial oversight and accountability, and stewardship practices. 

Billy Graham and a handful of other leaders had a vision to serve the evangelical community by forming ECFA. They envisioned an evangelical organization which set high standards, accrediting other evangelical organizations. Organizations would voluntarily apply, requesting to be held accountable for compliance with the standards.

The leaders knew that ECFA would not provide integrity to a ministry; ECFA accreditation would be an external reflection of a ministry’s internal integrity.

In 1979, significant questions were being raised about how certain religious leaders were handling funds provided by their supporters. In those days, the media was quick to criticize ministry leaders and extrapolate the misgivings of a few to the entire religious community. Sound familiar? There is generally a similar rush to judgment by today’s media.

Thirty-four years ago, ECFA took a stand on behalf of religious organizations—for self-regulation and against additional government oversight. Today, through the Commission on Accountability and Policy for Religious Organizations, ECFA is doing exactly the same thing as it facilitates responses to Senator Charles Grassley on a host of church tax policy issues.

Commission Chairman Michael Batts said, “ECFA exists to foster a policy of integrity in the form of self-regulation and accreditation without burdensome government regulation. That’s what ECFA exists to do. It is an opportunity to provide meaningful input into these areas that will really make a positive difference for the Kingdom.”

So, what are the differences between then and now? Then, there were no standards for governance, oversight of finances, and the raising and handling of charitable gifts. Then, there was no peer group to accredit evangelical organizations—no standards to achieve and no accreditation of Christ-centered organizations.

Now, ECFA’s standards are a model for the Christ-centered arena and other accrediting organizations. Even the Internal Revenue Service has come to embrace some of the governance principles of ECFA’s standards as their own.

Today, ECFA has a time-tested approach of accrediting Christ-centered organizations and assuring their supporters that they are complying with all of the standards—all of the time.

Today, more and more givers look for the ECFA seal of approval. ECFA helps accredited organizations operate within the ECFA guideposts—think of them as guardrails or bumper guards. This provides more freedom to provide ministry within the parameters than if there were no standards to follow. 

What was once a dream has become a reality. Today nearly 1,750 Christ-centered organizations, with 1,200 related entities and programs, are demonstrating integrity in that they utilize independent boards, engage independent CPAs for the organization’s annual financial statements, avoid conflicts of interest, handle charitable gifts with care, and much more.

So, “Why ECFA?” Because for over three decades, ECFA has modeled consistent, confidential, and fair application of high standards—many of them beyond the law. The ECFA seal enhances trust of givers, providing increased resources for ECFA accredited churches to fulfill the Great Commission. Christ-centered organizations increasingly want to participate in ECFA’s peer accountability process, so they can show third-party accreditation as evidence of integrity, transparency, and accountability. 

The Fiscal Cliff and Its Impact on Churches

Giving to churches is flat. No turnaround of the economy is in sight. Many church attendees are unemployed or underemployed. That’s the bad news.

The good news is that givers to churches are traditionally more dedicated than others. They are more committed to God’s work than concerned about tax deductions for their gifts.

The so-called “fiscal cliff” negotiations in December between President Obama and Congress placed the charitable deduction very much on the table. Since 1917, the deduction has served as a vital giving incentive for charities. There were talks of percentage caps, dollar caps, tax credit substitutes and a variety of other alternatives, which could have cost churches and charities billions of dollars in contributions. Even church supporters were concerned. Anything that would hurt charitable giving is a negative for churches.

Thankfully, the fiscal cliff deal, formally titled the “American Taxpayer Relief Act,” did not result in a flat percentage or aggregative cap on itemized deductions. There were positives and negatives in the fiscal cliff legislation impacting givers to churches—the “Pease limitation” was included, while the “IRA Rollover” was extended.

Looking at what happened through the fiscal cliff negotiations and with an eye toward the future, how does all this impact churches? Congress is far from through discussing issues which could impact charitable giving incentives.

Looking Back: The Pease limitation, what some have called a “back-door tax,” was reinstated and became a permanent provision of the tax code through the fiscal cliff deal. Taxpayers must decrease itemized deductions by 3 percent of the amount by which adjusted gross income exceeds a threshold amount. The Pease limitation is not new. It’s been with us in some form since 1990 (except for its repeal in 2010 that lasted through 2012). Plus, it is such an obscure provision that few donors associate it with gift considerations. Bottom line: there’s very little impact on churches associated with the reinstatement of the Pease limitation.

  It appeared the special charitable rollover provision relating to contributions from Individual Retirement Accounts was history after it expired on Dec. 31, 2011. Through the fiscal cliff deal, it was renewed retroactively for 2012 and prospectively for 2013, allowing taxpayers age 70-1/2 or older to make direct IRA or Roth IRA distributions up to $100,000 per year to qualifying charities without having to pay income tax on the withdrawn amount.

An additional bonus is that taxpayers can make these distributions by Jan. 31 and treat them as having been made in 2012.

Advantage for Churches The extension of the IRA charitable rollover provision is clearly helpful to many churches, as retired attendees may desire to give to their churches while meeting their IRA required minimum distributions each year. (In my February column, I will share more ideas of how churches can help givers use this IRA option.)

The most significant element of the fiscal cliff law was the increase in the highest marginal federal income tax rate, from 35 percent to approximately 40 percent (applying to individuals earning more than $400,000 per year and households above $450,000).

Otherwise, the current income tax rates were preserved for most Americans. Especially for higher income donors in your church, the higher marginal rates may provide an additional encouragement to donate generously and reduce individual income tax. The higher capital gains rates in the law likewise provide an added incentive for donating appreciated assets and avoid paying the increased taxes on capital gains.

A significant issue that received little attention in the fiscal cliff talks was the payroll tax reduction which expired on Dec.31, 2012. Lawmakers did not renew the two-percentage-point cut in the employee share of the social security tax. Church attendees who are employed saw smaller paychecks as of January 1, unless they got a raise that offset the impact. Self-employed individuals saw a similar increase in self-employment social security tax.

Looking Forward Major fiscal and tax policy issues remain unresolved. In the first quarter of 2013, the president and Republicans will duel again over raising the federal debt ceiling and the mandatory spending cuts known as sequestration. The GOP wants federal spending trimmed for every dollar in higher debt. The President will ask for increases in revenue by limiting business deductions. In the end, the ceiling will be raised. Will the charitable deduction be on the chopping block again? It is unclear.

Big picture Churches continue to have mostly clear sailing on the charitable giving incentives front. While it is helpful for church leaders to have a good working knowledge of charitable gift incentives, enabling them to have meaningful discussions on the tax aspects of charitable giving with attendees, churches should continue their focus on teaching biblical principles of generosity.