The Obama Administration released its budget proposal for 2014 on April 10, 2013, calling for nearly $250 billion in new spending on jobs, public works, and expanded preschool education and $580 billion in new taxes, primarily from the wealthiest taxpayers, as well as spending cuts of $1 trillion. As in past years, a number of proposed tax changes would affect charitable organizations and their donors. These proposed changes are described in the Treasury Department’s “General Explanations of the Administration’s Fiscal Year 2014 Revenue Proposals” (popularly called the “Greenbook”).
While the fate of these proposals is far from certain, these proposed changes, if enacted, would affect not only charities, but also certain taxpayers making contributions to charities. The items of the budget proposal aimed at charities and their donors include:
- Tax on Private Foundation’s Net Investment Income. Under current law, a private foundation is subject to a 2 percent tax on its net investment income. The tax is reduced to 1 percent if the foundation’s charitable distributions for the year exceed the average distributions over the five preceding tax years. The Administration’s budget proposal calls for a replacement of the current two-tier tax on the net investment income of a private foundation with a single tax rate of 1.35 percent.
- Mandatory Electronic Tax Filings. The Administration’s budget proposals would require mandatory electronic filing of all Form 990 series returns, including the Form 990-EZ. There would be transitional relief for up to three years for smaller organizations and organizations for which electronic filing would cause an undue hardship. The IRS would have the discretion to delay electronic filing of Form 990-T by those organizations with unrelated business taxable income for up to three years.
- Income Tax Proposals Affecting Individuals. For individuals in the 33, 35, and 39.6 percent income tax brackets, the effect of certain exclusions and deductions would be limited to the effect they would have had in the 28 percent bracket. And the “Buffett Rule” would be implemented by a new minimum tax, called a “Fair Share Tax,” phased in for adjusted gross incomes from $1 million to $2 million and ensuring a tax of at least 30 percent of adjusted gross income less a 28 percent credit for charitable contributions. These proposals are likely to move forward, if at all, in the context of a broad and intense debate about tax reform, the distribution of tax burdens, and the appropriate “balance” between spending and taxation.
- Estate, Gift, and GST Taxes. The Greenbooks for the last four years, all the years of the Obama Administration, have proposed permanently setting the estate, gift, and GST taxes at 2009 levels, in which the top rate was 45 percent and the exemptions were $3.5 million for the estate and GST taxes and $1 million for the gift tax, not indexed for inflation. Even though the rate and exemption for these taxes were permanently set in January 2013 at 40 percent and $5 million indexed since 2011, the current Greenbook renews the call to return to 2009 levels, beginning in 2018. It also calls for the “portability” of the exclusion amount between spouses to be permanently retained.
- Conservation Easements on Golf Courses. To prevent valuation and other abuses associated with “inflated” golf course easement deductions, the Administration’s budget proposal would eliminate a charitable deduction for any partial interest in property that is, or is intended to be, used as a golf course.
- Historic Preservation Easements. To prevent abuses, the Administration’s budget proposal would disallow a charitable deduction for the value of an historic preservation easement associated with forgone upward development of a historic building. In addition any contribution of a conservation easement on a building listed in the National Register would be required to comply with the same special rules currently applicable to buildings in a registered historic district, including the additional substantiation rules.
The President’s budget would also make an annual allocation of $12.9 billion to the IRS, including an increase of $1 billion over the 2012 level that is proposed for the enforcement program and the improvement of taxpayer services.