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Tax-exempt system under spotlight in wake of Trump Foundation's legal problems

Charity collection jar

Yes, as soon as I heard about the New York Attorney General filing a lawsuit against Donald J. Trump's charitable foundation, I checked the Internal Revenue Service exempt organization online search tool.

There it, or they, were.

When I entered Trump Foundation into the Tax Exempt Organization Search, or TEOS because everything in Washington, D.C. has an acronym, it turned up six results. The top two were what I was looking for:

Trump Foundation 
EIN: 13-3054537 | New York, NY, United States

Donald J Trump Foundation Inc.
EIN: 13-3404773 | Woodbury, NY, United States

Both organizations are listed in IRS Publication 78, the document that details which groups are eligible to receive tax-deductible charitable contributions, as private foundations.

When someone gives to a private foundation, the tax deductibility of such gifts generally is limited to up to 30 percent of the donors' adjusted gross income (AGI).

Public charities — tax-exempt groups like places of worship, Goodwill, Red Cross and Salvation Army to which most of us give — generally are 50 percent charities (or now, under Tax Cuts and Jobs Act (TCJA) changes, 60 percent charities when donations are in cash), meaning the deduction amount is up to half (or more) of AGI.

Many nonprofit tax designations, rules: Private and public charity designations are among the 11 types of deductibility codes used to annotate the nonprofits listed in Publication 78.

As for the groups themselves, after meeting IRS and tax code requirements, they are put into one of seven different and wide-ranging categories. They are all 501(c) organizations, which comes from the Internal Revenue Code section that created them, and fall into one of these areas:

  • 501(c)(3) for religious, educational, charitable, scientific, or literary organizations; testing for public safety organizations; as well as organizations dedicated to preventing cruelty to children or animals, or fostering national or international amateur sports competition;
  • 501(c)(4) for civic leagues, social welfare organizations and local associations of employees;
  • 501(c)(5) for labor, agriculture and horticultural organizations;
  • 501(c)(6) for business leagues, chambers of commerce and real estate boards;
  • 501(c)(7) for social and recreational clubs;
  • 501(c)(8) for fraternal beneficiary societies and associations; and
  • 501(c)(9) for voluntary employee beneficiary associations.

As I said five years ago in a post during the Congressional and public debate about tax status for groups that engage in political activities, enough already!

It's time to reduce the number of tax-exempt status designations.

SALT "charities," too: Tax code complexity is the most common complaint individual taxpayers have about our system. That's obviously is an issue with the section 501(c) rules.

The recent TCJA was touted as a way to simplify the system. It really didn't.

What it did do, though, was make itemizing less appealing, largely by increasing the standard deduction.

Charitable giving is an option that the new tax law left on Schedule A. But because of other restrictions, notably the $10,000 deduction limit on state and local income taxes, known as SALT in tax-speak, the charity designation is again under fire.

Tax-filing-for-charity-Schedule-A

In this case, it's states that are creating so-called charities to which their taxpayers can give their SALT payments that are in excess of the new deduction limit. This would, under the states' machinations, make these "donations" fully deductible.

The IRS is expected to soon formally strike down such SALT deduction workarounds. But lawsuits will follow that ruling.

Again. Just stop it.

Regardless of your personal or political opinion about the Trump family and its charitable efforts, the New York AG lawsuit and possible IRS investigation again point out that there are just way too many groups that are playing the tax code to their advantage, not necessarily to fulfill the needs of those for whom the groups ostensibly were created to help.

It's way past time to truly simplify and reduce the tax-exempt status possibilities so that we and the tax code focus on what charity is supposed to be.

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Susan

We have to reduce the number of tax-exempt status designations. And the tax code should be modified so that people can't use it for their advantage.

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