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Charitable giving has been a part of American culture for centuries. As government funding declines, charities are needed to take up more of the slack in terms of providing the assistance needed to hold our society together. There are also more and more charitable organizations which each year qualify under our tax laws as charitable organizations because people perceive a need for treatment for a disease or a cause. Some organizations that were formerly nationwide have fragmented into smaller independent organizations. Political groups have formed charitable arms to expand their philosophy, and support groups have been organized to support refugees from wars and famines.
A charitable gift can be a gift of virtually anything tangible. Cash, stock, real estate, vehicles, limited partnerships, furniture, art objects and other assets may be given to a charitable organization. Giving time and effort may be psychologically rewarding, but it does not produce a tax deduction.
A check is valid as a gift when given. Credit card charges are good when the credit slip is signed. I.O.U.'s or promises to pay are only deductible when fulfilled or paid.
When one buys a ticket to an event, the charitable deduction is only the excess that is paid over the retail value of the ticket.
The value of a gift for gift tax purposes is the current fair market value of the asset at the date of gift. If one gives a charity 100 shares of stock which is traded at $50 per share on the date of gift, a gift of $5,000 is being made. The rules for valuation of charitable gifts are no different than gifts to individuals.
Valuation of other assets, such as real estate, art objects, furniture, antiques and others are more difficult. Every year the tax court hears cases where the I.R.S. alleges that the value of the gift to charity is vastly overstated. It is necessary to get a written appraisal of assets other than cash and securities which are regularly traded on a major stock or bond exchange. The appraisal report and a special income tax form must be attached to the tax return on which one claims the deduction.
One of the reasons that people make gifts to charities is to obtain a deduction on their income tax return. When a person makes a gift to a charity, he or she normally gets an income tax deduction for the fair market value of the asset gifted. If one gives away stock worth $5,000, one gets a tax deduction for this $5,000 gift. This is true even if the stock cost $1,000. If the stock were sold, there would a $4,000 capital gain and tax on this amount would have to be paid. By giving the stock to charity, no capital gains is due, and the person gets the full deduction for the current value. The charity may then sell the stock, but since the charity is exempt from income tax, no one pays any tax on the gain.
There is a limit on the itemized deduction which one can take for gifts to charities during the year. To get the deduction one must "itemize" deductions on schedule A of the federal income tax return (form 1040) rather than accept the I.R.S. standard deduction of a fixed amount.
The amount one can deduct for gifts to charities on the tax return is limited. The deduction for cash gifts cannot exceed 50% of one's adjusted gross income for that year. Adjusted gross income is the total amount of one's taxable income minus certain adjustments to it. If the deduction exceeds 50%, one can only take off 50% on that year's return and can carry the excess over as a deduction for the next five years. The adjusted gross income is $60,000, and the person can give $50,000 cash to charity. The deduction this year is $30,000 (50% of $60,000), but the remaining $20,000 charitable deduction can be deducted on next year's return, and if not used next year, can carry over as a deduction for the following four years.
If a person gives long term capital gains assets (assets owned for more than 12 months), he or she gets a tax deduction for the current value of the asset. However, the maximum that can be deducted on the tax return for the year, if the person is giving gifts to a public charity or private foundation, is 30% of the adjusted gross income. The person again will have $60,000 of adjusted gross income. Perhaps he or she gives $25,000 of stock to his or her university. The person gets a $25,000 deduction but can only take off $18,000 as a result of this gift for the current year (30% of $60,000). The excess ($7,000) will carry over and can be deducted during the next five years.
Real estate, stocks, bonds, mutual funds and many other securities qualify for this tax treatment.
California allows the same tax deduction for income tax purposes as does the federal government. For federal income tax purposes, the gift of an appreciated asset does not give rise to the alternative minimum tax, which is a concern of some high income taxpayers. California does require that any capital gains be used in the alternative minimum tax computation.
A corporation can also make gifts, but the maximum deduction is 10% of the corporation's taxable income for that year, with a five year carryover of any excess.
Gifts to a charity or charities are no longer subject to reporting for gift tax purposes. If the gift made to one charity exceeds $11,000 in one year, a federal gift tax return is not required, since this was changed by federal law in October of 1997. No tax is imposed and it does not effect the unified credit at death.
California has abolished the state gift tax, so no return is due.
As previously mentioned, any amount may be left to a charity or charities at death. Any amounts left are exempt from estate tax, without limit. Unfortunately, bequests at death do not produce any income tax deduction.
If an individual makes a gift during lifetime, this reduces the person's taxable estate and also produces an income tax deduction. It is far better to make a gift during lifetime than to pass assets at death.
To qualify for the various tax benefits a charity must be a qualified charity. This means that the charity meets the requirement of the Internal Revenue Code and has a letter from the Internal Revenue Service stating that the charity qualifies.
To qualify, the charity must be a corporation, trust, community trust, fund or foundation organized in the United States, one of its possessions, the District of Columbia, or any state. The organization must be operated exclusively for religious, charitable, scientific, literary or educational purposes, for national or international sports competition, or for the prevention of cruelty to children or animals. A post or organization of war veterans or a cemetery company owned and operated exclusively for the benefit of members also qualifies.
There are a number of different ways of making gifts to charities. This can be done "outright" by making a direct gift of cash, real estate or securities, by use of a charitable remainder trust, using a pooled income fund, by a bargain sale or by a number of other methods.
Outright Gift
A charitable deduction is allowed for gifts to a charity. A deduction is allowed for cash given to a charity. A record must be kept and the person must have a letter or receipt from the charity acknowledging the gift. The full value of the gift is deductible, subject to the 50% income tax limit.
If one gives a traded stock, bond or mutual fund, or real estate which has been owned for 12 months or more, one gets an income tax deduction for the full value of the asset, not what it cost. An appraisal is needed, and if one is giving assets other than traded securities and which are worth more than $5,000, a special Internal Revenue Service form (form 8283) must be attached to the income tax return. To transfer assets, the person needs to physically transfer the stock or bond certificates, contact the mutual fund, or record a deed to transfer the real property.
The only complication is if the person has pledged the stock for a loan or owes money in terms of a mortgage or deed of trust on the real property. If that occurs, the donor must reduce the value of the charitable gift by the amount owed by the donor. It normally is not a good idea to transfer an asset subject to any loan or indebtedness.
Life insurance can be transferred by transferring the ownership to a charity. The value of the gift is the value of the person's insurance policy at the time of the gift. One can transfer the policy by contacting the insurance company and obtaining an assignment form to make the charity the new owner. The person gets an income tax deduction for the value of the policy and if one continues to pay the premiums, he or she gets an income tax deduction for future premiums paid.
Art objects, tangible personal property, boats, and automobiles can also be given to a charity. Here, the appraisal is very important. Many people have given away assets and then tried to get these items appraised at a value much higher than they were worth to get a large income tax deduction. The Internal Revenue Service requires that where the deduction exceeds $5,000 and where the charity sells, exchanges, or disposes of the item within two years of receipt, that a report be made of the sale and sales price to the Internal Revenue Service.
If the tangible personal property is for the use and purpose of the charity, a tax deduction is allowed for the full fair market value of the item. Capital gains do not have to be reported. Thus if one gives a famous painting to an art museum, one gets a full deduction.
However, if the gift has no relation to the charitable purpose of the organization, then one only gets an income tax deduction for the cost basis of the item. It will reduce the tax deduction to give the painting to the Boy Scouts instead of the local art museum.
Pooled Income Fund
For someone who wishes an annuity for life, a pooled income fund may be the best vehicle. A pooled income fund is like a charitable mutual fund. An individual contributes cash or marketable securities to the fund. There is no capital gains tax on the assets transferred. The beneficiary receives a charitable deduction based on his or her age, the amount of the gift, and the past earnings of the fund (Highest rate of return earned by the fund in the three years prior to gift).
The beneficiary then receives his or her proportionate share of the earnings on the fund while he or she is alive. At death, the fund keeps the income on that share for the charity. Although there are no capital gains, the beneficiary is taxable on moneys paid out by the fund each year. Depending upon the person's age, the annual return may be 8-9-10%.
Personal Residence Trust for Charity
A person may transfer his or her home or farm to a charity retaining a life estate-the right to continue to use and live on the property until death. A personal residence may include not only a personal residence but a vacation home, condo, etc. A ranch may only contain the home and a few surrounding acres.
The person who contributes the property receives an income tax deduction for the value of the property minus his or her lifetime use. This value is based on the value of the property and the person's age. At the person's death, the property passes to the charity and is not included in the person's estate for estate tax purposes.
A widow age 65 deeds her home worth $200,000 to a charity retaining the right to use it for her lifetime. Based on the Internal Revenue Service tables her income tax deduction in the year of gift would be approximately $50,000-60,000.
The individual gets the use of the property for his or her lifetime but cannot sell it since it passes to charity at death. The property can be rented while the individual is alive and the donor receives the income from the rent. The donor must keep up the property for lifetime and pay real estate taxes, insurance, and all other maintenance costs.
Bargain Sale
A bargain sale is where property is sold to the charity for a price less than fair market value. The difference between the sales price and the fair market value is the charitable gift, and the individual gets an income tax deduction for this amount.
John Doe sells his property which is appraised for $100,000 to a charity for $60,000. He is making a charitable gift at the time of sale for $40,000.
Unfortunately, the donor does not normally escape tax free. The person must report the sale and use his or her proportionate share of the cost. In the above example, if the cost of the real estate for income tax purposes is $40,000, and he is selling it for 60% of its value, he only gets 60% of his cost basis. Thus, his cost is $24,000 (60% of $40,000), and the gain if he sells it for $60,000 is the difference, or $36,000. This gain is taxable.
A bargain sale is useful if a person wants some money from the transfer of the asset but wishes a portion to go to the charity.
Scenic Easement
If a person owns real estate and wishes to restrict its future use to a scientific or conservation purpose, the person can give an easement which restricts the future use of the property. Someone may wish to donate land so that it may be a state or local park, so that it cannot later be sold for home development.
The donor who gives the easement gets an income tax deduction for the reduced value of the land. If it was worth $20,000 per acre for land development and is worth only $5,000 per acre for a park, the $15,000 per acre difference would be an income tax deduction at the time the easement is recorded.
A scenic easement is available for the preservation of land for outdoor recreation; education of the general public; the protection of the natural habitat for fish, wildlife, or plants or similar ecosystem; preservation of open space for the scenic enjoyment of the general public or pursuant to government conservation policies; and for historic structures in the national register or located in a registered historic district.
If a person is interested in such an easement, he or she should contact one of the local or national organizations who assist in connection with this, such as The Nature Conservancy, or another similar organization.
Gift Annuity
A gift annuity is an annuity which pays a fixed amount to a person for his or her lifetime or to husband and wife for their joint lifetimes. The approximate annual rate of return on the annuity amount based on the person or younger person's age is:
| AGE | % |
|---|---|
| 55 | 5.5 |
| 60 | 5.7 |
| 65 | 6.0 |
| 70 | 6.5 |
| 75 | 7.1 |
| 80 | 8.0 |
A person gives $100,000 to a qualified charity in return for a gift annuity. He is age 65 at the time of gift. He receives $6,500 per year for the rest of his life. At his death the annuity terminates and all funds are kept by the charity. He gets an income tax deduction when he establishes the annuity.
A portion of each annuity payment is tax free for income tax purposes. If the person lives beyond his or her life expectancy, then the annuity payments become fully taxable. A person can establish a gift annuity but have the payments start in the future instead of immediately. The charitable income tax deduction is obtained when the annuity is established regardless of when the payments commence.
A widow age 70 gives $25,000 to a charity. She receives annual annuity payments of $1,450, and she gets an income tax deduction when she establishes the gift annuity of approximately $11,000.
Gift annuities are not normally subject to the laws that apply to insurance and annuity companies. The person must rely on the charity for the payments.
Charitable giving is important and provides income tax deduction for the donor, depending upon the type of gift and value. This explanation only presents a very short summary of the opportunities available. There are numerous variations that people may use.
If a person is interested in making such a gift usually the charity should be contacted directly to discuss the gift and the nature of the gift (trust, outright, etc.). An individual should also consult with his or her attorney and accountant before formalizing and completing the gift.
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