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As the year draws to a close, many are thinking of making gifts to their favorite worthy causes. In fact, affluent Americans are expected to donate over $110 B to their favorite charities this year.
A donation to a non-profit entity is a great way to support causes near and dear to your heart. These donations not only make you feel good, but can also reduce what you owe Uncle Sam come April 15th.
Who: In order for your gift to be tax deductible, the recipient must be a qualified charitable organization. Contributions to an individual, a political organization or candidate are never deductible. Exempt Organization Select Check, a searchable online database available on IRS.gov, lists most organizations that are eligible to receive deductible contributions. In addition, churches, synagogues, temples, mosques and government agencies are eligible to receive deductible donations, even if they are not listed in the database.
What: The amount of a donor’s charitable deduction is generally limited to 50% of his/her total adjusted gross income (AGI) and may be further limited, depending on the type of contribution and the type of organization. A taxpayer may carry forward the unused portion of charitable deduction for five years.
The tax benefit of the gift is based on the individual’s marginal tax bracket. For someone in the 35% income tax bracket, a $1,000 cash gift would reduce her tax liability by the amount of the gift x 35%, or $350.
All of the political maneuvering that lead to the American Taxpayer Relief Act of 2012 threw another wrench into the works by reinstating the Pease limitation. This provision reduces total itemized deductions by 3% of any income over an AGI threshold of $250,000 for individuals or $300,000 for married couples, thereby impacting the tax benefit of charitable contributions.
Where: To be able to deduct the amount of your contribution, you must itemize your deductions and file a schedule A. If your non-cash contributions for the year are more than $500, you must also file Form 8283.
Additional points to ponder:
- Donations of non-cash property are usually valued at fair market value – the price that the property would sell for on the open market. Used clothing and other personal items are usually worth far less than the price you paid for them.
- You must have a written record about your donation in order to deduct any cash gift, regardless of the amount. Most legitimate charities acknowledge all gifts with a thank you letter, which will satisfy this requirement.
- An appraisal is almost always needed for specialized items such as jewelry and gems, paintings, antiques and other objects of art.
- The value of stocks and bonds is the fair market value (FMV) on the valuation/donation date. The FMV is the average price between the highest and lowest quoted selling prices on that date. In addition, any long-term capital gain on the donated securities is not taxed. For illiquid securities, your tax advisor will use a more complicated formula to determine the FMV for tax purposes.
- Real Estate – Because each piece is unique and its valuation is complicated, a detailed appraisal by a professional appraiser is necessary.
- Interest in a Business – The FMV of any interest in a business, such as a sole proprietorship or a partnership, is the amount that a willing buyer would pay for the interest after consideration of all relevant factors such as location, reputation, revenues, etc.
- A qualified conservation contribution is a gift of a real property interest to a qualified organization to be used only for conservation purposes. The organization must have a commitment to protect the conservation purposes of the donation and must have the resources to enforce the restrictions. Also, your contribution must be made only for the scenic enjoyment of the general public or under a clearly defined federal, state, or local governmental conservation policy.
Charitable Donations from IRAs
In the past, IRA owners who had reached age 70½ were allowed to make charitable donations of up to $100,000 directly out of their IRAs and have these donations count as a required minimum distribution (RMD). This rule expired at the end of 2011 but under The American Taxpayer Relief Act (“ATRA”), charitable minded seniors will, once again, have this option for 2013. You will not get a deduction for the charitable contribution, but you will avoid all taxes on this withdrawal and it will count as your RMD.
To qualify, the funds must be transferred directly by the IRA trustee to the eligible charity. Not all charities are eligible. For example, donor-advised funds and supporting organizations are not eligible recipients.
Charitable Trusts and Funds
For those who desire to donate in a more structured and generous manner or to bequeath a substantial portion of their estate to one or more charities, a “Charitable Trust” may be the answer. Charitable trusts may take one of two forms: a charitable lead trust or a charitable remainder trust. A third option that eliminates creating a trust all together is a Pooled Income Fund.
A charitable lead trust provides a stream of income for a fixed number of years to the charity; at the end of the period, the trust assets return to the grantor/donor or to a designated non-charitable beneficiary. The donor receives an immediate tax deduction when he/she makes the gift, equal to the present value of the future income stream.
A charitable remainder trust, on the other hand, provides a stream of income to the grantor or a non-charitable beneficiary, either for a fixed number of years or for life, while the charity receives the residual principal of the trust at the end of the time period or after the death of all the other beneficiaries. The amount passing to charity under a charitable remainder trust qualifies for a charitable estate tax deduction upon the death of the grantor.
Anyone interested in setting up a charitable trust should either seek the help of a good estate attorney or most larger charities and universities have excellent planned giving departments that can help structure such gifts.
A Pooled Income Fund is comprised of gifts that are pooled and invested together. Income from the fund is distributed to both the fund’s participants and named beneficiaries according to their share of the fund. As a donor to the fund, you can choose receive quarterly payments for life and upon your death the value of the assets will be transferred to the charitable beneficiaries.
The Rise of Donor-Advised Funds
Among the very wealthy, family foundations long have been common vehicles for charitable giving. In recent years however, more and more families are skipping foundations in favor of simpler and cheaper donor-advised funds.
Donor-advised funds (“DAFs”) saw striking growth in almost every metric, including assets under management, total contributions, and total grant dollars according to the National Philanthropic Trust. Assets in donor-advised fund accounts grew by $7.21 billion in 2012; total assets under management in all donor-advised funds accounts were an estimated $45.35 billion, an increase of 18.9% and a continuation of the steep growth trajectory begun in 2011. Much of the marked increase may have been due to the looming uncertainty in 2012 over proposed changes to the tax code that would impact charitable giving.
Each year many more donor-advised funds are being created than are private foundations. Among the ten largest DAFs, four are national (Fidelity, Schwab, Vanguard, National Philanthropic Trust, four are local community foundations (Silicon Valley, New York, Kansas City, and Chicago), and two are religious (National Christian Foundation and Jewish Communal Fund).
Donor-Advised Fund Growth Compared with Other Charitable Giving Vehicles (Dollar Value of Assets in Billions)
|Donor-Advised Funds||$ 38.1||$ 45.4||18.9%|
|Charitable Remainder Unitrusts (CRUT)||$ 86.9||$ 85.2||-1.9%|
|Private Foundations**||$ 540.1||$ 556.4||3.0%|
|Charitable Remainder Annuity Trusts (CRAT)||$ 7.1||$ 6.4||-9.7%|
|Charitable Lead Trusts (CLT)||$ 20.9||$ 23.7||13.1%|
|Pooled Income Funds (PIF)||$ 1.3||$ 1.3||-4.3%|
Source: National Philanthropic Trust report
A donor-advised fund is a philanthropic giving vehicle administered by a charitable sponsor. It allows donors to establish and fund the account by making irrevocable, tax-deductible contributions to the sponsor and recommending grants from those funds to other charitable organizations.
Convenience is a big factor as these funds avoid the work that family foundations entail, including running a board and engaging in audits. “They are very operationally easy,” says Sarah Libbey, president of Fidelity Charitable, which runs one of the nation’s largest donor-advised funds. “There’s no paperwork and everything is online. Establishing a private foundation is a real commitment of time and fiduciary responsibility.” Unlike private foundations with more complex reporting requirements, donor advised funds also allow donors to gift anonymously. With donor-advised funds, donations can be made in the name of the funds, and not in the name of the family members gifting the money or assets.
Flexibility is another favorable factor. In addition to checks, many DAFs accept publicly traded stock, privately-held C- and S- company stock, real estate, life insurance, art and various collections.
Another advantage is the more favorable tax treatment accorded these funds. As a public charity, donors can deduct up to 50% of their AGI for their donation. Donations to private or family foundations on the other hand, only permit deductions of up to 30% of AGI.
At this time of year-end giving, we hope that you have found this paper to be helpful. Please check with your accountant or tax advisor to ensure any advice works for your particular situation.