As we count our blessings this holiday season, it is a natural time to consider supporting favorite charities. And though supporting charity is worthwhile and rewarding in its own right, current law provides another reason to give, particularly as year-end approaches—tax benefits. For those considering such year-end gifts, some issues and alternatives to keep in mind:
Tax-Free Charitable IRA Rollovers. For individuals over age 70 direct gifts from an IRA of up to $100,000 to a public charity were extended for 2013 only. Previously, to use an IRA for lifetime charitable giving, one had to first take a distribution, creating taxable income, then contribute the funds and claim a deduction. In contrast, direct charitable gifts from an IRA create no taxable income, the equivalent of a 100 percent charitable deduction, regardless of adjusted gross income (or “AGI,” see discussion of limitations below), even for the approximately two-thirds of taxpayers who do not itemize. And, such gifts can satisfy a taxpayer’s 2013 required minimum distribution, if not already taken.
General Limitations on Charitable Deductions. In most cases, the charitable deduction is subject to limitation based on income, with some ability to carry unused deductions forward for use in the future. For contributions to public charities, the deduction for cash gifts is generally limited to 50 percent of one’s contribution base (AGI, disregarding net operating losses); the deduction for gifts of appreciated property is limited to 30 percent of contribution base. For contributions to private foundations, the deduction limit for cash gifts is 30 percent of contribution base, and the limit for gifts of appreciated property is 20 percent. Special rules apply when contributions are made both to public charities and private foundations, or when contributions consist of both cash and appreciated property.
The “Pease” Limitation. Also in 2013, for the first time since the Bush tax cuts, itemized deductions, including the charitable deduction, may be subject to the so-called “Pease” limitation for high-income filers: AGI of more than $300,000 for joint filers or $250,000 for single filers. Pease reduces itemized deductions by 3 percent of the amount by which AGI exceeds this limitation, but cannot eliminate more than 80 percent of the total itemized deductions. For example, joint filers with AGI of $500,000 and itemized deductions of $30,000 would have those deductions reduced by $6,000 [($500,000–$300,000)x3% = $6,000, which is less than $24,000, or 80 percent of $30,000]. For a majority of itemizing taxpayers, those with non-charitable itemized deductions (property taxes, state and local income taxes, etc.) sufficient to “absorb” the Pease limitation, Pease should not dissuade year-end charitable gifts. However, those without non-charitable itemized deductions to absorb Pease (for example, high-income taxpayers in states with no income tax) may not get the full benefit of a charitable deduct-ion for a large year-end gift. Consult your tax adviser to see if the Pease limitation affects your year-end planning.
Appreciated and Depreciated Property. If using appreciated property, especially securities, to fund a charitable gift, consider contributing it directly instead of selling first and contributing the proceeds. By allowing the charity to complete the sale, one avoids capital-gains tax and, if applicable, the new 3.8 percent Affordable Care Act surtax on net investment income, and obtains an income-tax charitable deduction for the securities’ full value (subject to the limitations above). With depreciated property, consider selling to claim a capital loss, a benefit charities cannot use, and then contribute the proceeds for a charitable deduction.
Charitable Remainder Trusts. To retain economic benefits for a period or for life while generating a charitable income-tax deduction, consider funding a charitable remainder trust. With a CRT, the donor retains a right to receive annual payments (either an annuity or a fixed percentage of the CRT’s value) with the remainder passing to charity, but takes an immediate income-tax deduction for the charitable remainder value. As an added benefit, CRTs are tax-exempt, so low-basis property can often be contributed and sold without recognizing gain, though payments back to the donor will usually be taxable.
Donor Advised Funds. A simpler, less-expensive alternative to starting a private foundation, donor-advised funds offer a way to establish a charitable giving fund, obtain a current deduction, and decide who may make future grant recommendations. These funds are administered by tax-exempt community foundations or other public charities and can be easily established as a means to involve the entire family in a donor’s philanthropic goals for years to come.
Timing. To take a 2013 deduction, a charitable gift must be completed by Dec. 31. Different rules on completion apply for different types of assets. So, verify in advance that your gift will be “completed” by year-end.