Investments
2008-06-01 13:45:00
No good deed goes unpunished
Question: Can charitable giving help reduce both estate and income taxes?
Answer: The short answer is yes. The long answer is a little more involved because, for those who are charitably inclined, there are a multitude of ways to transfer your assets to charity and receive favorable income and estate tax treatment, all without jeopardizing your or your family’s needs. You should first know that many methods of charitable transfers can be extremely complex. It is essential the lawyers, accountants and other professionals you employ to help you carry out your charitable intentions be experienced at navigating the dangers. The good news is that many philanthropic organizations that rely on gifts from the public have their own set of “planned giving” advisors available to review your plan and give direction about the best way to accomplish your charitable goals.
The following is a brief outline of the various types of gifts a person can make and the restrictions and benefits that come from them. Before making a substantial gift, you should always consult with your estate planning lawyer, tax advisor and CERTIFIED FINANCIAL PLANNER™ Professional.
Lifetime gifts: Gifts made during lifetime should be deductible from income tax. The income tax deduction for charitable contributions in any tax year is limited to a percentage of the taxpayer’s adjusted gross income (50%, 30% or 20%) depending on the type of property donated and the kind of organization to whom the gift is made. Unused deductions may be carried forward into future tax years. A donation of tangible personal property during life can result in a deduction of the item’s cost basis. There is an exception for donations of property related to the charity’s exempt purpose, which would permit a fair market value deduction.
Donations of some kinds of property are better suited for charitable gifts. Particularly, highly appreciated property like securities, collectibles and real estate, because, once in the hands of the charity, the sale of the asset is usually not subject to capital gains tax.
Gifts made after death: Qualifying charitable gifts made by an estate are entitled to and estate tax deduction equal to the gift’s fair market value at the time of death.
Gifts with Retained Interests: Quite often, when charitable gifts are made during a person’s lifetime, the donor may retain an interest in which income is paid to the donor during his or her lifetime. These arrangements can be established as charitable remainder trusts and can be structured in many ways. The donor receives a partial income tax deduction based on the present value of the remainder interest. The property transferred will not be included in the donor’s gross estate after death and, therefore, not subject to estate tax.
Individual Retirement Accounts: Currently, IRA owners over 70½ may make distributions of up to $100,000 of IRA assets and receive a charitable deduction. IRA owners under 70 ½ would first have to make a taxable distribution to themselves before making a charitable contribution. Because of the income tax deduction limits, the IRA owner would have to pay taxes on part of the distribution. There is legislation pending, called the Public Good IRA Rollover Act that would allow direct transfers from an individual’s IRA to a qualifying charity. The law does not permit a charitable deduction, but such a transfer would not result in taxable income for the donor.
Real Estate: Like other kinds of appreciated property, gifts of real property to qualified charities may avoid capital gains tax when sold by the charity. A gift of a remainder interest should entitle the donor to a charitable income tax deduction. Donors should know that transfers of income producing property to charities or charitable trusts can result in taxation to the charity or trust on the unrelated business income of the property. Most charities will want to be able to sell the property as soon as possible to avoid the tax and because they aren’t equipped to be able to manage the property.
As you can see, charitable giving can be an effective way to reduce income and estate taxes. Before considering it, you should have a genuine charitable intent. And again, don’t take any steps without first consulting with your estate planning lawyer, tax advisor and CERTIFIED FINANCIAL PLANNER™ Professional.
