Do you travel for charity? You may not be taking advantage of the many tax breaks that the federal government offers for charitable travel expenses.Continue Reading...
Last week the United States Treasury proposed new regulations for Charitable Remainder Trusts (CRTs), which affects the tax liability of distributions in 2013. CRTs are a common type of trust that allows assets to be donated to a charity while the donor receives income for the specified trust period. Trust grantors take advantage of income and estate tax deductions.Continue Reading...
There's good news if you've reached age 70 1/2, and you have an IRA and philanthropic inclinations. Through 2011, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 resurrected the opportunity to make cash donations to IRS-approved charities directly out of your IRA.
Such qualified charitable distributions are federal-income-tax-free, but you get no itemized charitable deduction on Form 1040. But that's okay. The tax-free treatment of qualified charitable distributions equates to an immediate 100 percent deduction, since the otherwise-taxable IRA dollars are sent directly to charity.
Who Benefits Most
The qualified charitable distribution opportunity is beneficial for taxpayers who:
1. Have reached age 70 1/2.
2. Make charitable donations, but don't itemize deductions. (Under the normal rules, only itemizers get tax-saving benefits from charitable gifts).
3. Make large charitable donations, but their deductions would be delayed by the 50 percent-of-AGI limitation.
4. Want to avoid being taxed on required minimum distributions that they are forced to take from IRAs.
5. Are looking for a quick and easy estate-tax-reduction strategy.
A qualified charitable distribution is a payment of an otherwise taxable amount out of a traditional or Roth IRA directly to an IRS-approved public charity. No more than $100,000 can be donated during any one year. However, if both you and your spouse have IRAs set up in your respective names, each of you is entitled to a separate $100,000 limitation.
As things currently stand, the ability to take advantage of this strategy is scheduled to expire at the end of 2011, but Congress may extend it again.
Income Tax Advantages
Qualified charitable distributions are not included in your adjusted gross income (AGI). This lowers the odds that you'll be affected by unfavorable AGI-based provisions -- such as the rule that can cause more of your Social Security benefits to be taxed and the rules that can reduce or eliminate deductions for medical expenses and passive losses from rental real estate.
In addition, you don't have to worry about the 50 percent-of-AGI limitation that can delay itemized deductions for garden-variety charitable donations of cash.
Finally, a qualified charitable distribution from a traditional IRA counts as a payout for purposes of the IRA required minimum distribution rules. Therefore, you can arrange to donate all or part of your 2011 required minimum distribution amount (up to the $100,000 limit) that you would otherwise be forced to receive and pay income taxes on. In effect, you can replace taxable required minimum distributions with tax-free qualified charitable distributions that go to your favorite charities.Continue Reading...
WASHINGTON — Individuals and businesses making contributions to charity should keep in mind several important tax law provisions that have taken effect in recent years.
Some of these changes include the following:
Special Charitable Contributions for Certain IRA Owners
This provision, currently scheduled to expire at the end of 2009, offers older owners of individual retirement accounts (IRAs) a different way to give to charity. An IRA owner, age 70½ or over, can directly transfer tax-free up to $100,000 per year to an eligible charity. This option, created in 2006, is available for distributions from IRAs, regardless of whether the owners itemize their deductions. Distributions from employer-sponsored retirement plans, including SIMPLE IRAs and simplified employee pension (SEP) plans, are not eligible.
To qualify, the funds must be contributed directly by the IRA trustee to the eligible charity. Amounts so transferred are not taxable and no deduction is available for the transfer.
Not all charities are eligible. For example, donor-advised funds and supporting organizations are not eligible recipients.
Amounts transferred to a charity from an IRA are counted in determining whether the owner has met the IRA’s required minimum distribution. Where individuals have made nondeductible contributions to their traditional IRAs, a special rule treats transferred amounts as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds, as would be the case with regular distributions. See Publication 590, Individual Retirement Arrangements (IRAs), for more information on qualified charitable distributions.
Rules for Clothing and Household Items
To be deductible, clothing and household items donated to charity generally must be in good used condition or better. A clothing or household item for which a taxpayer claims a deduction of over $500 does not have to meet this standard if the taxpayer includes a qualified appraisal of the item with the return. Household items include furniture, furnishings, electronics, appliances and linens.
Guidelines for Monetary Donations
To deduct any charitable donation of money, regardless of amount, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. Bank records include canceled checks, bank or credit union statements, and credit card statements. Bank or credit union statements should show the name of the charity, the date, and the amount paid. Credit card statements should show the name of the charity, the date, and the transaction posting date.
Donations of money include those made in cash or by check, electronic funds transfer, credit card and payroll deduction. For payroll deductions, the taxpayer should retain a pay stub, a Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.
These requirements for the deduction of monetary donations do not change the long-standing requirement that a taxpayer obtain an acknowledgment from a charity for each deductible donation (either money or property) of $250 or more. However, one statement containing all of the required information may meet both requirements.Continue Reading...
This courtesy of Professor Chris Hoyt of the University of Missouri (Kansas City) School of Law:
The Tax Court rejected an argument made by the IRS that a donor should
not be able to claim a charitable income tax deduction for a
contribution to a private foundation because the donor effectively
controlled the private foundation. The case is Foxworthy, Inc. v. Comm,
T.C. Memo. 2009-203 (Sept. 9, 2009). This appears to be the first time
that the IRS has raised this argument in court, and it was soundly
rejected by the Tax Court.
The conclusion is helpful to also resolve questions about claiming
charitable income tax deductions for contributions to donor advised
funds and donor directed funds.
The cases that I have found where the courts disallowed a charitable
income tax deduction because of excessive donor control tend to occur
when the donor retains excessive control over the contributed property
(e.g., failure to deliver the property; retained possession of the
property; etc.). By comparison, the ability of a donor to advise or even
direct the specific charitable organizations that should receive grants
from a donor advised fund (Sec. 4966(d)), a donor directed fund (e.g.,
Sec. 170(b)(1)(e)(iii)), or a charitable remainder trust (Rev. Rul.
76-371, 1976-2 C.B. 305) has never before been an issue to prevent an
individual from claiming a charitable income tax deduction under Section
170. This new Tax Court decision buttresses that result.
Click "Continue Reading" for the excerpt of the Tax Court's opinion of the charitable deduction issue. It was just one of issues that the Tax Court addressed in its lengthy opinion.
There are two primary types of charitable trusts - charitable remainder trusts (CRTs) and charitable lead trusts (CLTs). CRTs are far more common, and are generally funded with a minimum of about $100,000 worth of assets. With federal income and capital gains tax rates to increase the future, these trusts should see renewed popularity, particularly if the stock market begins to move from bear to bull. However, taxpayers in the top federal rates should be aware of Obama's plan to limit the charitable deduction to a maximum of 28%.
Charitable Remainder Trusts
For those of you who have the desire to make a gift to charity but feel that you can't afford to part with a significant portion of your estate and receive nothing in return, a charitable remainder trust may prove to be the answer. The attraction of CRTs is that in addition to the income tax and estate tax deductions available, the donor of the trust receives income from the trust for a specified period. As discussed below, making a charitable gift by way of a CRT is most advantageous when highly appreciated, low-yield assets are used to fund the trust.
This bill was recently introduced in the U.S. House of Representatives, and is for the expansion of IRA charitable rollovers, which are currently limited to those who have reached 70 1/2, may be no more than $100,000, and must go to a 501(c)(3) organization.
The bill does away with the $100,000 limit, lowers the eligible age to 59 1/2, and expands the permissible recipients for those at least 70 1/2 to split interest entities (e.g. charitable remainder trusts).
Click "Continue Reading" for the full text of the bill.
The Triangle Community Foundation (TCF) is holding a celebration tonight of its 25th anniversary (I'm pleased to say that I will be attending). The TCF is a tremendous asset to the greater Triangle area, providing millions of dollars annually in funding to local non-profits.
One feature of such charitable foundations is that one can establish a Donor Advised Fund (DAF) at the foundation for a particular area or areas of interest. A tax-deductible contribution can then be made to the foundation, even if the funds under the DAF will not be distributed until later.
For example, I could set up a DAF with the TCF, to be focused on childrens' welfare. I could contribute $10,000 to the TCF on December 31, 2009, and take a tax deduction. Then, during 2010, I could suggest (advise) to the TCF that distributions be made to the Boy or Girl Scouts, UNICEF, BIg Brothers, Big Sisters, etc.
DAFs can also be established in one's Will or Trust, with one's children or other family members serving as the advisers. DAFs are much simpler and less expensive than family private foundations, although private foundations do offer more control by family members. I normally recommend against private foundations unless they will ultimately be funded with at least $1 million.
Happy birthday, TCF!
Probably an increase in 2010 and a substantial drop thereafter.
From Professor Chris Hoyt of the University of Missouri (Kansas City) School of Law:
President Obama has released his controversial budget. The proposal
that affects charitable organizations the most is that the tax benefit
that upper-income taxpayers would receive from their charitable gifts
would be limited to 28%, beginning in 2011. The same 28% limit would
also apply to tax savings from the home mortgage interest deduction.
Also the highest marginal tax rate would increase from 35% in 2010 to
the Clinton-era rates of as high as 39.6% in 2011.
So, if in 2011 a rich person gets an extra $100 of income and donates it
to charity, the extra $100 would be subject to a nearly 40% federal tax
rate but the charitable gift would only produce a $28 tax saving. The
rich person must spend nearly $12 in taxes to make the gift.
(1) Expect wealthy donors to prepay in 2010 contributions that they
would normally make in 2011 and 2012. The nation's charities
experienced this when Ronald Reagan lowered the highest tax rates from
50% to 28% as part of the 1986 Tax Reform Act. Gifts surged in 1986 but
fell in 1987. So, if the proposal is enacted, expect major gifts to
decrease in 2011 since some donors prepaid their gifts in 2010.
(2) There could be a boon in grantor charitable lead trusts in 2010
since a donor can get a charitable income tax deduction in the year that
the charitable lead trust is funded rather than in the year that the
lead trust makes its charitable gifts. Visualize it: the donor gets a
2010 charitable tax deduction and saves 35% yet the charity receives
gifts in later years when the donor would have only had a 28% deduction.
The donor and the charitable lead trust will likely increase investment
in tax-exempt municipal bonds in future years to avoid the higher 39.6%
marginal tax rate.
(3) If enacted, then 2010 will be a boon year to establish a private
foundation or a donor advised fund. A rich person can get tax savings
at a 35% rate in 2010 and then have grants flow out in later years when
the charitable gifts would have only produced a 28% rate tax savings.
(4) "Charitable IRA Rollover" will become especially attractive in 2011
and later years, if it is in fact extended. Rich people will really
want to keep taxable IRA distributions out of their income. They won't
mind the fact that they are losing a charitable income tax deduction in
2011. It would have only saved 28%. Charitable IRA rollover could
effectively save them the 12% on each gift.
(5) None of this might happen. The President proposed a budget, but it
is Congress that actually makes the budget and changes the tax laws. It
will be interesting to see how proposal works its way through Congress.
The complaints and the lobbying have already started.
Conrad Teitell, one of the nation's most foremost charitable gift planning attorneys, has, on behalf of the American Council on Gift Annuities and the National Council on Planned Giving, written Congress urging changes to IRA distribution laws:
- Removing the $100,000 cap on IRA charitable rollovers
- Allow similar transfers to charitable gift annuities and charitable remainder trusts
- Make the law permanent
Click "Further Reading" for the full text of the letter and the proposed bill. The same letter was sent to House leaders.
BTW, Teitell is a former professor of mine, and a very entertaining speaker. I'll never forget how he incorporated a rubber chicken into a talk on income and estate rules relating to charitable giving!Continue Reading...
In a Private Letter Ruling issued late in 2007, the IRS approved a clever technique to leverage a gift to your favorite charity using your IRA and life insurance. Developed by Douglas Delaney, a CPA and attorney in South Carolina, the "CHIRA®" works something like this:
- The donor rolls over funds from a regular IRA to a self-directed IRA. The donor and the charity apply for the life insurance.
- An loan (with market rate interest due) is made to the selected charity from the donor's new IRA. The loan is secured by a new life insurance policy purchased by the charity on the life of the donor. The charity signs a promissory note payable to the IRA.
- The charity assigns to the IRA the portion of the death benefit equal to the outstanding loan from the IRA.
Here's an example for the CHIRA® website:
A 74 year old donor decides to loan $1 million from her IRA to her favorite charity. The charity uses $30,000 each year to purchase a $1 million life policy on her life. The death benefit is used to fully repay the loan. Today, the charity will have $970,000 to allocate to their charitable purposes as well as a prudent interest and premium reserve. Whether it is cash to sustain their budget for a few years, or to put shovels in the ground two years early, the CHIRA® plan provides immediate capital without income tax to the donor.
The IRS concluded that (1) this is not a prohibited transaction within the meaning of Section 4975 of the Internal Revenue Code which would terminate the IRA under Section 408(a)(3), and (2) is not a prohibited investment in life insurance by an IRA under Section 408(a)(3) of the Code. What this means is that this technique results in no taxable income to the donor.
However, this a complex, multi-step technique, and everything must be done correctly in order to achieve the intended consequences. If you decide that a CHIRA® makes sense for you, make sure that you consult with tax counsel to ensure that you will face no adverse tax consequences.
Click "Continue Reading" for the full text of PLR 200741016.Continue Reading...
The Emergency Economic Stabilization Act of 2008 (H.R. 1424) passed the House yesterday, and was quickly signed by President Bush. The law includes an extension of the IRA Charitable Rollover, which allows individuals age 70 and older to transfer up to $100,000 per year to public charities, tax-free. It is in effect for 2008 and 2009.
Here's Professor Christopher Hoyt's report a recent decision from the Tax Court on this issue:
By way of background, a gift over $250 is not deductible unless the
charity delivers a letter to the donor that states (a) the amount of the
donation plus (b) a statement that there were no goods or services
provided to the donor. (If there were any goods or services, then the
statement must describe the goods or services and set forth a good faith
estimate of the value of those goods or services.) Sec. 170(f)(8)(C);
Reg. Sec. 1.170A-13(f)(3)
Here the donors made tithes to their church but the church failed to
give the statement with the magic language. Despite the cancelled
checks and the Tax Court's acknowledgment that the tithes were
charitable gifts, the charitable tax deduction was disallowed. The
church finally sent a letter with the magic statement that there were no
goods or services after the donors were audited, but since the letter
was received after the return was filed so it was not "contemporaneous"
The court case stresses the need for all charities to competently send
to their donors a contemporaneous written acknowledgment for all gifts
of $250 or more.
Thus, a CRT income beneficiary who has had that interest in the CRT for a year or longer can, in many cases, sell their interest and pay taxes at the current 15% long-term capital gain rate. (State taxes would be additional).
Given that the capital gains rates are at historically low levels, this can be a way to turn a long term income interest into a lump sum that can be enjoyed currently, while avoiding potential future increases in tax rates.
There are companies that will purchase interests in trusts, including CRTs.
The Decedent had a "pour-over" will requiring that his probate estate be added to his living trust. The trust provided that upon Decedent's death distributions are to be made to certain beneficiaries with the remainder going to four charitable organizations. The Decedent had an IRA at the time of his death but there was no designated beneficiary as the named beneficiary was deceased. Therefore, the Decedent's estate became the beneficiary by default. The Trustee of the living trust and the personal representative of the estate proposed to satisfy the residuary bequest to the charities by assigning the IRA to the four named charities.
IRC Section 691(a)(1) provides that income in respect of a decedent (IRD) assets owned at death are included in the gross income of the estate or the person, who, by reason of the owner's death, acquire the right to receive the asset. A traditional IRA is an IRD asset (Rev. Rul. 92-47, 1992-1 C.B. 198). Under Sec. 691(a)(2), if a right to an item of IRD is transferred by an estate who received the asset by reason of the owner's death, the asset is included in the gross income of the estate.
However, the term "transfer" under Sec. 691(a)(2) does not include the transmission of an IRD asset at death if the transmission occurs pursuant to the right of the person receiving the asset by reason of a decedent's death by bequest, devise or inheritance. The IRS held that the transfer of the IRA in satisfaction of the Decedent's residuary bequest from his trust is not a transfer within the meaning of Sec. 691 and is thus not includable in the gross taxable income of decedent's estate.
The IRD will be considered income to the four charities, but since they are tax exempt organizations, no tax will be due.
To see the full text of PLR - 200826028, click "Continue Reading."
On May 21, the U.S. House passed the Renewable Energy and Jobs Creation Act of 2008 (H.R. 6049). The act includes a one year extension of the Charitable IRA rollover and similar tax provisions and updated tax incentives for renewable energy. The state and local sales tax deduction, and tuition deduction extensions are also included.
The Senate and the White House support the continuation of the charitable rollover, but Bush will most likely veto the act in its current form since it includes $54 billion in tax increases and no extension of AMT relief.
The House Ways and Means Committee passed H.R. 6049, the Energy and Tax Extenders Act of 2008, on May 15, 2008. The bill includes a one-year extension of the $100,000 IRA Rollover for taxpayers age 70 and over, as well as many other tax extenders and renewable energy provisions.
Included in the bill are one-year extensions on the deduction for state and local sales tax, a deduction for educational expenses, the teacher's expense deduction, a provision allowing non-itemizers to deduct a portion of property taxes, and an expanded child tax credit for low-income taxpayers.
Charitable-related extensions include the enhanced deductions for gifts of apparently wholesome food, gifts of books to schools, gifts of computers for educational purposes and favorable Subchapter S basis rules for gifts of appreciated property.
Charles Rangel (D-NY), Chairman of the Committee, commented that "This bill would provide critical tax relief to help working families cope with the rising cost of living. Furthermore, this bill would extend vital tax incentives for American businesses to help them invest in new technologies and remain competitive internationally." He also stated that the bill's energy provisions will "reduce our dependency on foreign oil."
Let's hope that's true! Look for passage of the bill by the House and Senate sometime next month.
This post is excerpted from an article in the May 19, 2008 Giftlaw eNewsletter.
On April 17, Senators Max Baucus (D-MT) and Charles Grassley (R-IA) introduced a bill for 2008 and 2009 which would extend certain tax laws until December 31, 2009. The bill includes an increase in the AMT exemption for 2008 to $46,200 for individuals and $69,950 for couples, energy credits and tax extenders. The most notable extension is the Charitable IRA Rollover - IRA owners over age 70½ would be able transfer tax-free up to $100,000 directly to qualified charities, as was allowed last year.
I only had one client inform me that he did the full $100,000 charitable rollover in 2007, but I am certainly in favor of contuining this benefit. Taking the $100,000 as income and then taking a deduction for the same amount, if possible, is generally not as favorable from a tax standpoint.
This from Professor Chistopher Hoyt at the UMKC Law School, with good news for S Corporation owners:
The IRS released a revenue ruling that confirmed many of our hopes regarding charitable gifts of appreciated property by a Subchapter S corporation. Normally a shareholder's income tax deduction for an S corporation's business losses is limited to the shareholder's basis in the corporation's stock. The IRS confirmed that charitable gifts can qualify for better tax treatment. The IRS concluded that if an S corporation made a charitable contribution in 2006 or 2007 of appreciated property (such as real estate), the shareholder was entitled to claim a charitable income tax deduction that exceeded the shareholder's basis in the stock. This favorable tax treatment was a temporary measure contained in legislation that expired in 2007, but it is one of the "extender" laws (like "Charitable IRA rollover") and there is a good chance that it will be extended into 2008.
Rev. Rul. 2008-16; 2008-11 IRB 1
Below is a recent article by Will Swarts on SmartMoney.com:
IF YOU THINK OF yourself as financially generous, you probably are, particularly if you're part of the growing number of Americans whose investable net worth is anywhere from $100,000 to $3 million — the so-called mass affluent. This group's ranks are growing, and so are their charitable donations.
Even if you aren't buying a new wing for the hospital or endowing your alma mater with a new gym, you don't need to be Warren Buffett or Bill Gates to make the most of the money you want to give away.