Assignment 2: Tax Framework For Charitable Giving Flashcards
Seek counsel
Always advise client or donor to get independent tax and legal advice
Defer to the client’s independent counsel for the application of tax law to the client’s own situation
Requirements for deduction
A charitable contribution can be deducted for income tax purposes if there is:
- An irrevocable and complete transfer
- Transfer is to a qualified charity
- Made without consideration or benefit to donor
(Exception: Most planned gifts)
Irrevocable & Complete Transfer
- Donor parts with something and charity receives something
- Incomplete transfers:
- Donor retains control over property
- Donor retains a right to its income
- Donor retains the power to revoke
- Donor receives something in return equivalent to the gift
Entire Interest
Donor must transfer his/her entire interest in the property, or no deduction is allowed
Exceptions:
- Gifts of an undivided partial interest in the entire property owned by donor
- Charitable remainder trust
- Charitable lead trust
- Remainder interest in a personal residence or farm
- Qualified conservation easement
- Pooled income fund
Gift of partial and undivided interests
- Donor wishes to give some, but not all, of a particular asset to charity (this could include part of a farm, apartment building, or land without breaking it into parcels, shares, partnership interests–by deducting an undivided partial interest)
- Cash and publicly traded securities are easy to give and receive
- Privately held securities will involve an appraisal, but the donor can give some shares of the stock or partnership interests
- Land can be deeded into parcels, with some kept and some given
Deductible or Not?
Deductible: undivided partial interest
- Give a one-third undivided partial interest as tenants-in-common in a farm, including whatever rights the donor has to the minerals, oil, water, etc.
Not deductible: divided partial interest
- Keep a rental property, but let charity use it
- Give the land, but retain mineral rights
- Give the orchard, but retain right to harvest it
- Give a car, but retain right to drive it
- Give a painting to an art museum for one month, and donor hangs it in their house the other 11 months (donor must transfer complete ownership to the charity within 10 years)
Tangible Personal Property
IRS is less favorable toward rules for art, coins, collectibles and other forms of tangible personal property.
IRS wants to discourage donors from giving partial interest in collectibles while keeping the collection on display in their own home.
E.g. Partial interest in piece of art where the art museum displays it for a period of time, and then it reverts back to the donor. (See Recapture Rules)
Recapture
- Donor must be in the process of transferring the gift completely within 10 years
- If not, the deduction is “recaptured” as taxable ordinary income to the donor with a 10% tax penalty
- When the balance gift is fulfilled, the deduction for the remaining amount is based on the value of the property when the first interest was given
- Donor will not benefit from any appreciation that occurs after the first undivided partial interest was given
Qualified Charities
Pub. 78: IRS publication listing eligible charities
- entity organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or to foster amateur sports competition (but only if no part of its activities involves providing athletic equipment or facilities), or for the prevention of cruelty to children or animals.
- War veterans organization or auxiliary organized in the US
- Domestic fraternal society
- Cemetery company owned and operated exclusively for its members
- Deduction not allowed if the organization has racially discriminatory policies, is communist-controlled, or attempts to influence legislation or participate in political campaigns
Foreign Charities
No income tax deduction for gifts to foreign charities or governmental agencies
Deduction is allowed for a gift to a domestic charity even though all or some funds may be used in foreign country (US charity must control money and approve overseas projects as being within its own exempt purposes–expenditure responsibility)
Gifts to invidivuals
Not deductible
Gifts to charities benefiting individuals are deductible as long as gifts are not earmarked for a specific person, charity retains control, donative intent–donor wanted to benefit charity, not the individual recipient
Gift of services
No deduction allowed for contribution of services
Unreimbursed, out of pocket expenses incurred as a result of volunteering may be deductible (cost of local transportation, purchase of supplies, postage etc.)
Without consideration or benefit
Donative intent: transfers something, receives nothing
Quid Pro Quo: gift is made and donor gets something of value in return (parking spots, free event tickets, free meals, etc.)
If the gift is to be considered a quid pro quo gift, the gift value is reduced by the actual value of the goods or services received (not the cost to the charity)
Quid Pro Quo
- Applies to premiums and “benefit” events
- Should be disclosed in solicitation
- Applies if goods or services are made available, whether or not they are accepted
- Donor can rely on charity’s good faith estimate of their value (unless a donor knows the estimated value is unreasonable)
- Ignore: gifts of unsubstantial value (within limits)
- Token items (coffee mugs, calendars, pens bearing charity’s name or logo)
Charitable deductions: Deductible
- Churches, synagogues, temples, other religious orgs
- Federal, state, local governments (solely for public purpose
- Nonprofit schools and hospitals
- Salvation Army, Red Cross, CARE, Goodwill
- War veterans groups
- Expenses paid for a student living with you, who is sponsored by a qualified org and is enrolled as a FT student in grade 12 or lower
- Gift to Dept of Treasury to pay down public debt
- Allowing a charity to use the donor’s property rent-free (or for a minimal charge); right to use property is treated as contribution of a partial interest
Not Deductible
- Civic leagues, social and sports clubs, labor unions, chambers of commerce
- Foreign orgs (except certain Israeli, Mex, Canadian charities)
- Groups run for personal profit
- Groups whose purpose is to lobby for law changes
- Value of blood given to a blood bank
- Individuals
- Tuition
- Purchase of raffle, bingo or lottery tix
Date of Gift
Gift is complete when donor relinquishes control and delivers to charity
In person--date that charity's rep receives the gift Mail or delivery via USPS--postmark rule Mail or delivery via FedEX, UPS--Date package arrives at the charity's office Credit card--Date charges occur Text messages--date donor send the text message if charged to wireless account Pledges--deductible in year pledge is fulfilled Reissue stock (transfer ownership)--date corporate records change "Street name" stock--date on which transfer is complete Tangible personal property--delivered to charity or transferred to charity's agent (title must be transferred)
Substantiation
Gift acknowledgement requirements for IRS
- Less than $250 (no written acknowledgement needed)
- $250 or more (written acknowledgement–states no goods or services received in exchange of gift; if yes, good faith estimate of gift)
Noncash gifts:
- $500-$5000–donor files Form 8283
- $5,000+–donor files 8283; appraisal required
Noncash Securities:
- Publicly traded–donor files 8283, charity does not sign
- Nonpublicly traded–Over $5000 donor files 8283, charity signs. Over $10,000 appraisal required
Noncash Art:
*$20,000 or more, appraisal required; $50,000 or more statement of value from IRS
Noncash Vehicles/Boat/Airplanes:
*Depends on use; strict requirements
Donee Info Form (8282)
“Tattletale Form”
- filed by charity if it disposes property valued at more than $500 within 3 years of charity acquiring it
- if used by charity, does not file form
- charity provides description of donated property, how that use is related to its charitable purpose, whether it provided certification of that use to donor
- charity discloses price at which property was sold
Qualified appraiser
- Earned appraisal designation or has met min education and experience requirements
- Regularly performs appraisals for compensation
- has knowledge of type of property appraising
- appraisal must be made not more than 60 days before date of contribution
- Appraiser cannot be connected to charity or donor
- Fee cannot be percentage of appraised value of property
Gifts of Securities
Publicly traded securities do not require an appraisal to document their value (valued according to the mean of the high/low selling price on the date of the gift)
Nonpublicly traded securities valued over $5,000 must be reported on Form 8283. Nonpublicly traded securities over $10,000 requires a qualified appraisal
Gifts of Art
Valued at $20,000 or more requires a qualified appraisal
If valued at $50,000 or more, ask IRS for statement of value (user fee of $6,500 for up to three items)
Gifts of Vehicles, Boats, Airplanes
Deduction depends on what the charity has done with the gift:
- Sells it: donor’s deduction is limited to the amount of the gross sales price obtained by the charity
- Uses it: donor deducts FMV subject to AGI limits
Strict substantiation requirements when claimed value is over $500
Recent Tax Legislation
TCIA: Tax Cuts and Jobs Act of 2017
- sweeping tax reform
SECURE Act: Setting Every Community Up for Retirement Enhancement Act (Dec 2019)
- making retirement savings easier and more accessible (increased RMD age to 72)
CARES Act: Coronavirus Aid, Relief and Economic Stimulus Security Act (March 2020)
- response to COVID-19 pandemic
Calculating Income Tax
Gross Income (all your income earned or received during the year)
– Adjustments (“Above the Line” deductions)
= Adjusted Gross Income (AGI)
– Standard deduction ($12,400 for single, $24,800 for married filing jointly) OR Itemized deduction
= Taxable Income
CARES Act deduction
Taxpayers taking the standard deduction get an above-the-line deduction of up to $300 for qualified charitable contributions made in 2020.
- -Must be cash contributions
- -Not to supporting orgs or DAFs
- -$300 applies to tax-filing unit, joint filers do not get $600 deduction
What counts towards itemized deductions?
Up to $10,000 SALT (state and local taxes) for single taxpayers, or couples filing jointly
–deduct their property taxes plus either their local income taxes or sales taxes, but not both.
Taxpayers can deduct mortgage interest paid on acquisiting indeptedness up to $750,000
–For homes purchased on or before 12/15/17, the max amount of acquisition debt is $1M
Unreimbursed health costs above a threshold
Bunching
For taxpayers who cannot itemize and benefit from their charitable contributions, donors can “bunch” or increase their charitable contributions in specific or alternating years to exceed the standard deduction
Graduated & Progressive Rates
Tax Brackets
- Rates apply to taxable income
- Federal rates range from 10% to 37%
- Charitable deductions, for itemizers, reduce taxable income at the highest marginal rate
Capital Gains Tax
Profit on sale of an investment (sold more than it cost)
Short-term–hold for one year or less; taxed as ordinary income
Long-term–Hold for more than a year; Taxed at 0, 15, 20%
Exception: Collectibles–taxed at 28%
Benefit: Capital gains tax is avoided in the transfer of long-term capital gain property to charity
After-Tax Cost of a Cash Gift
Amount contributed - Tax saved or avoided = Cost of gift
Medicare Withholding
Medicare payroll tax is now at 2.35% for taxpayers above a threshold amount
Net Investment Income Tax (NIIT)
“Unearned Income Medicare Contribution Tax” or “Medicare Surtax”
Interest, dividends, payments from rental properties, capital gain distributions from mutual funds, etc.
3.8% tax
Depends on filing status; single is $200,000, married filing jointly is $250,000; amounts do not change unless changed by Congress
Income tax deduction for charitable contributions does not offset NIIT
Pease Amendment
Prior law (through 12/31/2017) reduced itemized deductions by 3% for taxpayers with AGIs exceeding certain thresholds
For 2018-2025, this law is suspended
Donors making large gifts should consider timing
5 Year Carry Forward
The maximum charitable contribution deduction allowed in a tax year is determined by the taxpayer’s contribution base (generally AGI)
Charitable contributions in excess of the annual AGI limits can be carried forward for 5 years
Factors in limitations
The amount of charitable deductions than an individual can deduct in a tax year depends on:
- Type of charity receiving gift
- Type of property donated
- Fair market value of the gifted property
- Basis donor has in property
Types of charity
Public Charities (college, UW, religious organization, hospital, private operating foundation, etc.)
Private Charities (private non-operating foundation, veterans orgs, certain cemetery associations, fraternal orgs, etc)
Types of Property Given
Generally, gifts are deductible at FMV
Ordinary income property is deductible at basis.
- inventory held for sale in a business
- life insurance
- deferred annuities
- short-term capital gain property
- property created by donor
AGI Limitations
Public Charity (50%)/Private Charity (30%)
Cash (60/30)
Ordinary Income property (50/30)–lesser FMV/basis
Long-term cap gain (30*/20**)
Tangible property (50/30)
- FMV–donor may elect to “step down” the deduction to basis in which case deduction limits are same as with cash
- *Basis–unless gift is of qualified appreciated stock (publicly traded)
CARES Act & AGI
Cash contributions to qualified charity from an individual taxpayer after 12/31/2017 and before 1/1/2020, the 60% limitation applies
Under the CARES Act, in 2020, deduction for qualified contributions is allowed up to 100% of the taxpayer’s AGI if:
- contribution made in cash
- during calendar year 2020
- to a public charity, not to a supporting org or DAF
Tangible personal property
You can touch it, it can be moved around unlike real property or intangibles like stocks and bonds, intellectual property
Not used in trade or business (inventory/equipment)
Examples: collections of coins, cars, stamps, antiques, jewelry, works of art
Generally deductible at FMV minus gain, unless property will be used by charity for its exempt purpose
- *Given to the charity - valued at basis
- *Given for the use of the charity - valued at FMV
Tangible property: unrelated use
If unrelated to recipient org’s tax-exempt purpose is deductible up to 50% of AGI (public charity)
Deduction limited to lesser of basis or FMV
Example: Oil painting given to a charity that simply sells the painting
Related Use but Recapture
If property given for use by the charity in its exempt purpose is resold by the charity within 3 years, difference between deduction for FMV and for basis is recaptured by the taxpayer
No recapture if charity gives the taxpayer a good faith certification at time of the gift that property will be retained and used for exempt purpose
Collectibles
Quirk of law…capital gains tax is 28%
Significant incentive to consider collectibles as gifts IF put to a related use by charity
Creative Works Given by Their Creator
Deductible at basis, not FMV
Appreciated Property to PF
Gifts of appreciated property to PF (other than operating foundations) are deductible at the lesser of FMV or basis UNLESS property is “qualified appreciated stock” (publicly traded)
Step-Down Election
Election is available whereby a donor can reduce the amount of the deduction for long-term capital gain property to basis
If election is taken, deduction limit is 50% of AGI, rather than 30%
Election must apply to all such property gifted in a tax year
Corporate Percentage Limitations
Generally 10% of taxable income, regardless of type of property or charity
Under CARES Act, corporations are allowed up to 25% of taxable income for cash contributions in 2020 to a qualified charitable org (not a supporting org or DAF)
Unused deduction can be carried forward 5 more years until exhausted
Transfer Taxes
Taxes on transfer of anything of value from one individual to another
- Gift taxes (during lifetime)
- Estate tax (at death)
- Generation-skipping tax (skips one generation)
Combines gifts you make during your lifetime and death – all potentially subject to gift and estate tax
Annual and Lifetime Exclusions
Annual exclusion: $15,000/year ($30,000/couple)
Applies to each recipient of a gift
Lifetime exclusion: $11.58M
Cumulative total for 2020 (adjusted for inflation) each year during lifetime or at death
Tuition and Medical Exclusions
Gifts for tuition and qualified education expenses (must be made directly to the education institution)
Gifts for medical expenses (must be made directly to the medical services provider)
Spousal Exclusion
Unlimited amount can be contributed to a spouse without a gift tax
Exemption portability: survivor takes deceased spousal unused exemption amount
Only the most recent spouse is entitled to this exemption, to prevent serial remarriage as a tax strategy
Income Tax Deduction
Gifts to charities that exceed the annual gift tax exclusion are generally subject to gift tax
If the gift tax is to a qualified charity, an unlimited gift tax charitable deduction is available
Deduction remains subject to the percentage limitations
Estate Tax Deduction
If property is included in gross estate and transferred to a qualified charity, charitable deduction for estate tax is normally allowed
Estate tax and income tax structure treat charitable gifts to qualified organizations differently
Estate tax charitable deductions are NOT subject to percentage limitations
Charitable Bequests
$43 billion (10% total giving) –Giving USA 2020 study
- To qualify for estate tax deduction, gift must be made by decedent through appropriate legal documents
- Gift cannot be defeated by contingency, event or person
- If the gift is left to the executor’s discretion or occurs by operation of the state intestacy laws, deduction is not available
- State laws differ on how estate gifts are treated at death
Qualified Disclaimer
Estates qualify for estate tax deduction if a qualified charity gets the bequest as a result of a qualified disclaimer (heir properly disclaims a bequest and it passes to charity named in legal document–becomes deductible from the estate)
Stepped-Up Basis
Capital gain property received from a decedent will step up or step down to the FMV at date of death (or alternative valuation date within 6 mo of death, if property has not yet been sold)
Ordinary income property (deferred annuity, value of an IRA) DOES NOT step up
Step-up rules apply even when there is no estate tax due at death (Even donors with less than estate tax-level wealth should consider the effect of stepped-up basis in their multi-generational income tax planning)
Carryover Basis
When given to an heir during life rather than at death, a capital asset will have “carry over basis” not “stepped up basis” in the hands of the recipient.
Basis will be what it was in the hands of the giver, and if capital gain is in the asset, the capital gain will be taxable when the beneficiary sells the asset
Generation-Skipping Transfer Tax
Applies to transfers outright or in trust that would skip a generation’s rightful layer of transfer taxes
Highest rate applicable for estate or gift taxes in the year of applicability
Provides an $11.58M exemption, but is not portable, unlike the estate tax exemption
$15,000 annual exclusion as well
40% GST rate, highest transfer tax bracket
**Be careful if a donor is wealthy enough to be subject to estate tax and wants a charitable tool to pay to the grandchildren. Flag the GST issue and consult with qualified counsel.
