When Giving to Your Alma Mater: All Donations May Soon Not Be Treated Equally

For several months now, we have been following Congress’ efforts to address the rising costs of higher education and its recent focus on endowments as a potential solution to the issue (see here and here).  Now, as Congress pushes forward with drafting a comprehensive tax reform plan, it appears that higher education institutions will need to remain vigilant and be prepared to defend their endowments against potential regulation.

Over the past few years, the House Ways and Means Committee has held a number of hearings on the costs of higher education, and has focused on better understanding college endowments.  Some members of the Ways and Means Committee, led by Rep. Tom Reed, have suggested that colleges and universities should be doing more with their endowments to help to reduce the cost of higher education. Most colleges and universities, however, view their endowments as a means of ensuring the long-term sustainability of the institution and as a means to offset a portion of the school’s operating costs.  Colleges and universities also suggest that free spending of endowment money is not as easy as the House seems to believe it is.  Generally, endowments consist of restricted and unrestricted funds; and restricted funds can only be spent according to the terms imposed by the donor and are not available for other purposes. 

Recently, however, Rep. Reed suggested that the restricted vs. unrestricted donation issue could be cured through the tax reform process.  Under a plan that Rep. Reed is currently developing, he has stated that he wants to incentivize donations that go to the “right purpose.”  To that end, Rep. Reed has suggested that donations that go to supporting scholarships for working class families should be tax-deductible to the donor at 150%.  Additionally, any unrestricted donations should be deductible at 125%.  However, Rep. Reed also wants to discourage restricted donations, and, under his plan, restricted donations in amounts greater than $5,000 would no longer be deductible by the taxpayer.

Up until now, many House members have appeared noncommittal on Rep. Reed's proffered plans for more-affordable postsecondary education.  Nevertheless, overhauling the charitable giving deduction by incentivizing some gifts and discouraging others is a theme that also has seen support outside of the higher education discussion.  The interest in a charitable deduction overhaul, while not certain, should at least catch the interest of other members of Congress, and potentially generate some momentum for this reform.

As we head further into a comprehensive tax reform process, it appears that the focus on college and university endowments is only just beginning.

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