D O YOU PLAN TO MAKE A BIG GIFT TO CHARITY SOME DAY? DO IT NOW. MAYBE. CONGRESS HAS CREATED A SIGNIFICANT, TEMPORARY, TAX BREAK: -----CASH, CASH DONATIONS MADE TO MOST PUBLIC CHARITIES FROM AUG. 28 THROUGH DEC. 31 CAN BE USED TO OFFSET UP TO 100% OF YOUR 2005 ADJUSTED GROSS INCOME, UP FROM THE NORMAL 50% LIMIT.
While the increase was passed in the name of Hurricane Katrina relief, it can be used for any charitable purpose. You can even honor an old pledge, so long as you
deliver the cash by Dec. 31.
“It’s a window of opportunity,” says Robert F. Sharpe Jr., a Memphis, Tenn. lawyer and planned giving consultant.
About that “maybe”: “For some people it’s an opportunity that shouldn’t be taken,” warns Laura Peebles, a charitable giving guru at Deloitte Tax in Washington, D.C. After all, if you donate more than you can deduct in a given year, you can carry the deductions forward for up to five years. Before deciding whether to elect the temporary Katrina break (you can donate and not use it), you’ll need to consider your future giving plans, expected income, possible federal tax law changes, state taxes and even the alternative minimum tax. One more relief act for CPAs.
Only cash donations qualify for the temporary break. The donation of stock or other appreciated property to a pub lic charity can, as usual, offset a maximum o f 30% of your income. Combining all the different limits gets tricky.
Say you’re retired with $100,000 in AGI and gave $30,000 in appreciated stock and $20,000 in cash before Aug. 28 . Now you give another $50,000, thinking you’ll wipe out your taxable income. Nope. You’ll be able to claim only a $70,000 deduction in 2005—for the cash contribution—and will have to carry forward the entire deduction for your $30,000 in stock donations. (That might not be bad—if you’re not planning to make big donations again next year.)
Another complication: Congress wanted to make sure the 100 % deduction helps charities doing good deeds now. So cash contributions to a donor-advised fund, such as the Fidelity Charitable Gift Fund—where money can idle for years before being dribbled out to other charities—aren’t eligible for the Katrina break. Cash gifts to private nonoperating foundations (92% of all private foundations) can offset only 30% of AGI.
Assuming you want to use the 100% deduction, where should you get the cash? If you earn a nice salary or have income (say, from an S corp or partnership) taxed at ordinary rates of up to 35% and you don’t have cash lying around, consider selling stock losers.
Since just $3,000 of capital losses can be deducted against ordinary income, selling losers won’t reduce your AGI—or your 100% deduction limit—by much, and you can carry forward the rest of your capital losses to offset future gains. Or you can sell winners this year, too, to sop up the losses.
Retired donors looking to make a big gift and maybe thinking about estate planning, too, should consider drawing from a regular individual retirement account. That is, one funded with pre-tax money . Distributions from these IRAs are taxed at rates of up to 35%. Better to leave the kids’ stock in taxable accounts; they get a step-up in basis, meaning your heirs can sell immediately and owe no income tax.
Normally, taking a big lump from your IRA and giving it away while you’re alive creates a substantial income tax bill. But between Aug. 28 and Dec. 31 the federal tax on a donated WA typically will work out to 1%, says Christopher Hoyt, a tax professor at the University of Missouri-Kansas City School of Law. (For the mathematically curious, that number happens to be the product of 35%, the top tax rate, and 3%, the amount that your adjusted gross income is artificially inflated via a backdoor income tax surcharge invented by Congress in 1990.)
Residents of Indiana, Massachusetts, Michigan, New Jersey and Ohio need to be particularly careful, Hoyt warns. Those states tax some or all IRA distributions but don’t allow an offsetting charitable deduction. Watch out, too, for California: It doesn’t automatically conform to federal tax law changes and hasn’t adopted the temporary 100 % deduction.
Novembe r 14, 2005.
Church of the Science of God
La Jolla, California 92038-3131
© Church of the Science of GOD, 1993