Philanthropy is a deeply embedded tradition in the United States. Before the government started caring for the penurious and indisposed, individuals shouldered the burden. Despite 75 plus years of government involvement, individual philanthropic interest have not diminished.

In 1917 the United States entered the First World War and it became necessary to provide revenue to defray war expenses. That was the express purpose of the revenue Act of 1917, which was intended to raise 1.8 billion of additional taxes.

Along the way to its passage by Congress, the 1917 Act was variously amended. The purpose of one such amendment was to allow

…a deduction in computing net income under the income tax of such an amount not to exceed 15% of the taxpayers net income, as the taxpayer contributes through the year to corporations and associations organized and operated exclusively for religious, charitable, scientific, or educational purposes, or to societies for the prevention to cruelty to children and animals.

As finally adopted, the amendment allowed U.S citizens and residents to deduct, in computing taxable income,

…contributions or gifts actually made within the year to corporations or associations organized and operated exclusively for religious, charitable, scientific, or educational purposes, or to societies for the prevention to cruelty to children and animals., no part of the net income of which inures to the benefit of any private stockholder or individual, to an amount not in excess of fifteen percent of the taxpayer's taxable income as computed without the benefit of this paragraph.

Enactment of the income tax charitable deduction was soon followed by an estate tax charitable deduction. Originating the estate tax Act of 1921, the estate tax charitable deduction had retroactive application to the estate of all decedents who died after December 31, 1917.

Finally, the gift tax charitable deduction came into being as part of the Gift Tax Act of 1932.

Those were the simple beginnings of the charitable deductions. But these deductions have not remained so simple. Over the years since 1917, the simple income tax charitable deduction quoted above has been amended several times and now fills 20 pages (which include both current law and prior amendments) of a prominent tax publisher's reprint of the Internal Revenue Code. Add to that provision the other income tax provisions relating to charitable giving and estate tax laws, the many pages of Treasury regulations, Internal Revenue Service revenue rulings and decisions from various federal courts, and the resulting total of official information alone on charitable contributions is startling. Include also the unofficial sources-such as published articles, books, speeches, tax services and private letter rulings dealing with charitable giving-and the resulting mass of information is overwhelming.

The vast amount of material available on the tax aspects of charitable giving makes it difficult for those who have an interest in the subject, but who have no need to be expert in it, to separate that which is most important from what is not.

Charitable giving has long been a part of our socioeconomic system. The resources devoted to charitable activities through private philanthropy have fulfilled a variety of human needs that otherwise would not have been met.

To encourage philanthropy in the private sector, Congress since 1917 has granted favored tax treatment to charitable contributions by individuals, who are the principal source of charitable giving. The generosity of those individuals is reflected in the record of their giving in 1994--$105 billion of individuals gifts and $8.8 billion of bequest to charitable organizations according to Giving U.S.A. (Total donations, including those made by foundations and corporations, totaled $129.9 billion in 1994.)

The federal individual income tax is the largest single item in the budgets of many taxpayers. Minimizing the income tax burden is, therefore, a legitimate part of personal and family financial planning. Taxpayers should not make important financial decisions, including those dealing with significant charitable contributions, without considering their income tax consequences.

Estate and gift tax rates under the unified transfer tax system also can be burdensome. And in situations where it applies, the generation-skipping transfer tax can render a proposed transfer of property economically unfeasible. Accordingly, tax considerations play an important part in determining how best to pass an estate to a donor or a testator's successors, including chosen charitable beneficiaries.

The humanitarian and moral aspects of private philanthropy always have been it's primary motivating forces. The tax benefits that reduce the costs of that philanthropy, however, have assumed increasing importance as our tax system has grown in complexity and scope.

Excerpts from Arthur Andersen Tax Economics of Charitable Giving