Although corporations make substantial charitable contributions and are generally subject to the same rules as individuals, this handbook focuses on individual charitable giving and does not deal with the specific limitations and rules that apply to C corporations. Because of the pass-through nature of S corporations, partnerships, and limited liability companies, the rules discussed in this handbook are applicable to charitable contributions made by such entities.
The rules outlined in this handbook are based upon the federal tax laws in effect on January 1, 1998. For donors not living in Virginia, Maryland, or other "conformity states" having rules that parallel the federal ones, the state tax impact should be considered in planning transactions.
Table of Contents
Methods of Giving and Tax Consequences
Outright Lifetime Gifts
Partial Interest Gifts
Bargain Sales
Bequests
Charitable Remainder Trusts
Pooled Income Funds
Charitable Gift Annuities
Remainder Interests in Personal Residences and Farms
Charitable Lead Trusts
Overview Of Tax Rules Applicable Internal Revenue Code Sections
- Section 170-Income tax charitable deduction rules and percentage limitations.
- Section 501-Enumeration of categories of exempt organizations, for example, 501(c)(3).
- Section 509-Rules classifying 501(c)(3) organizations as private foundations or public charities.
- Section 2055-Estate tax charitable deduction rules.
- Section 2522-Gift tax charitable deduction rules.
- Section 4940 through 4947-Private foundation excise tax rules that are applicable to split-interest trusts (charitable lead and remainder trusts) as well as private foundations.
- A donor who itemizes deductions is entitled to an income tax charitable deduction for contributions to qualified charitable organizations.
- Certain higher income taxpayers must reduce their itemized deductions by the lesser of three percent of the excess of their adjusted gross income over a certain dollar amount (as adjusted for inflation each year) or 80 percent of the amount of itemized deductions otherwise allowable for the tax year.
- Not all tax-exempt organizations qualify as charitable organizations.
- If the gift is to a "50 percent-type" organization (generally churches, universities, hospitals, and other broadly-supported charities), the donor is generally entitled to deduct the full amount of the contribution up to 50 percent of the donor's adjusted gross income (the "50 percent ceiling" rule).
- For gifts to a "50 percent-type" organization of capital gain property held more than one year that has appreciated, the donor may deduct the full fair market value of the gift up to 30 percent of the donor's adjusted gross income (the "30 percent ceiling" rule).
- A five-year carry-over applies to any portion of a charitable deduction that cannot be deducted because of the percentage limitations.
- In the case of gifts of appreciated property, the donor avoids tax on the appreciation.
- Special deduction limits apply to gifts to private foundations.
- Generally, contributions to organizations that qualify for the income tax deduction qualify for the estate and gift tax charitable deductions.
- For estate and gift tax purposes there are no limitations on the amount of the deduction for qualifying contributions.
Reporting Requirements Substantiation, Reporting, and Appraisals
- No income tax charitable deduction is available for a separate contribution of $250 or more unless the taxpayer has a written receipt or other acknowledgment from the charity (which must be received before the tax return claiming the deduction is filed) of the contribution (including a good faith estimate of the value of any goods or services provided to the taxpayer in exchange for making the gift). Taxpayers may not rely on a cancelled check as substantiation for a donation of $250 or more.
- To claim an income tax deduction for a contribution of property (other than cash) valued at more than $500, the donor must obtain a receipt from the donee organization showing the name of the donee, the date and location of the contribution, and a description of the property in reasonably sufficient detail. The donor must also complete and file Section A of Form 8283 with the Internal Revenue Service.
- If the contributed property (other than cash or publicly traded securities) has a value in excess of $5,000 ($10,000 in the case of nonpublicly traded stock), the donor must obtain a qualified appraisal of the property. In addition, the donor must complete the appraisal summary on Form 8283.
- In the case of a gift of artwork with an aggregate value of $20,000 or more, a complete copy of the signed appraisal must be submitted with Form 8283. An 8" x 10" color photograph must be provided upon request.
- If the donee charity, within two years after the gift, sells property for which an appraisal summary was filed, the charity must report the sale on Form 8282.>
- The value of any annuity, interest for life, term of years, remainder, or reversionary interest must be determined under applicable federal rate (AFR) tables prescribed by the Internal Revenue Service.
- The tables use an interest rate equal to 120 percent of the midterm rate, as published monthly, rounded to the nearest 2/10 of one percent.
- The donor may use the rate for the month in which the valuation date falls or either of the two preceding months.
- Higher rates tend to increase deductions for charitable remainder annuity trusts, fixed annuities, and deferred annuities.
- Higher rates tend to decrease deductions for charitable lead annuity interests and gifts of remainder interests in personal residences and farms.
- Charitable lead unitrusts and charitable remainder unitrusts are generally not affected by changes in the rates.
- A donor is subject to an "accuracy-related penalty" of 20 percent of the portion of understatements of tax to which the penalty applies and which is attributable to "substantial" understatements of income tax, valuation overstatements, and negligence.
- The charity is subject to a penalty for the failure to file a timely, complete, and accurate Form 8282.
Compliance
- A charity that receives a payment in excess of $75 made partly as a contribution and partly in consideration for goods or services provided to the donor by the charity is required to provide a written statement to the donor that:
- Informs the donor that the amount of the contribution that is deductible for income tax purposes is limited to the excess of the amount of any money (and the value of any property other than money) contributed by the donor over the value of the goods or services provided by the charity; and
- Provides the donor with a good faith estimate of the value of goods or services furnished to the donor by the charity.
Methods Of Giving And Tax Consequences
Outright gifts and bequests can involve either:
- A partial interest, either an undivided (fractional) share or a life estate/remainder transaction;
- The donor's entire interest in the property.
Retained interest gifts take one of the following forms:
- Charitable remainder annuity trusts;
- Charitable remainder unitrusts;
- Pooled income funds;
- Gift annuities;
- Gifts of remainder interests in personal residences or farms.
The rules in this section apply to gifts to "public" charitable organizations. Special rules exist for gifts to private foundations.
Outright Lifetime GiftsPartial Interest GiftsCash - dollar-for-dollar deduction subject to the 50 percent ceiling.
Securities and real estate held more than one year - full fair market value deduction subject to the 30 percent ceiling. An election is available to use the 50 percent ceiling, but the deduction is limited to basis.
Securities and real estate held one year or less - deduction limited to basis subject to the 50 percent ceiling. Ordinary income property-deduction limited to basis subject to the 50 percent ceiling.
Related use tangible personal property - full fair market value deduction subject to the 30 percent ceiling. An election is available to use the 50 percent ceiling, but the deduction is limited to basis. If the use is unrelated to the charity's exempt function or if the item has not been held more than one year, the deduction is limited to basis and the 50 percent ceiling applies.
Life insurance - deduction limited to basis (premiums paid), even though cash surrender or replacement value is greater, subject to the 50 percent ceiling. Subsequent premiums paid directly by the donor are subject to the 30 percent ceiling.
Other intangibles - generally full fair market value deduction subject to the 50 percent ceiling.
- Generally no charitable income tax deduction is allowable for a gift of a partial interest in property (that is, a gift of less than the donor's entire interest in the property).
- Special exceptions are made for the following (which are deductible):
- A partial interest if it represents the donor's entire interest in the property (for example, a gift of a life estate if all the donor has is a life estate). The application of this rule is not clear in situations where the donor has recently disposed of another interest in the property;
- An undivided portion of the donor's entire interest in the property (for example, a gift of a 25 percent interest as a tenant in common in a parcel of real estate);
- Property transferred to a charitable remainder annuity trust, a charitable remainder unitrust, or a pooled income fund;
- A contribution of a remainder interest in a personal residence or farm (whether or not occupied by the donor);
- A qualified conservation contribution (for example, a conservation easement to preserve a marsh for wildlife).
- Examples of nondeductible partial interests:
- The rent-free use of an office building by charity for a term of years;
- The gift to charity of a remainder interest in a parcel of investment real estate;
- The gift to charity of a remainder interest in a work of art;
- The loan of an artwork to a museum for exhibition;
- A gift of a personal residence to a trust under which the donor retains for himself or another the right to occupy the residence.
- Insubstantial rights may be retained without violating the partial interest rule:
Bargain Sales
- Right to train hunting dogs on donated land;
- Year-round right to store personal property in a vacation home in which charity was given an undivided interest;
- A right-of-way in favor of the donor.
- A deduction is allowed for the difference between the fair market value and the sales price.
- Basis must be allocated between the gift portion and the sale portion.>
- A gift of mortgaged property is treated as a bargain sale.
- A transfer of property in exchange for a gift annuity is treated as a bargain sale.
- Generally, no income tax deduction is available to the decedent or his estate for a bequest to charity. Special rules apply to allow an income tax deduction to an estate for amounts payable to charity out of the gross income of the estate.
- A full fair market value deduction is available to the estate for estate tax purposes.
Description - The donor transfers assets to a trustee and provides for income payments of at least five percent of the initial value of the trust assets in the case of an annuity trust, or at least five percent of the value of the trust assets as valued annually in the case of an unitrust, to one or more beneficiaries for a term of twenty years or less or for the lives of the beneficiaries. The remainder interest passes to a charitable organization at the termination of the income interest. In the case of an annuity trust, the donor may not make additional contributions to the trust.
Income Tax Consequences - If the trust is funded with appreciated property, the deduction is generally limited to the 30 percent ceiling. If the trust is funded with appreciated property, the donor avoids tax on the capital gain.
Estate and Gift Tax Consequences - If the donor retained a life interest, the trust is included in the donor's gross estate, but there is an offsetting charitable deduction (unless there is a secondary beneficiary, in which event only the charitable remainder is deductible). If the donor did not retain a life interest, the assets contributed to the trust are removed from the donor's estate. Generally there are no gift tax consequences in establishing the trust where the donor retains the right to revoke the rights of other beneficiaries.
Description - Donors irrevocably transfer assets to the trustee of a pooled income fund maintained by a charitable organization and reserve the right to income for themselves or other beneficiaries for life. At the death of the donor or other beneficiary, the charitable organization receives the remainder interest in the assets contributed by the donor.
Income Tax Consequences - The donor is entitled to an income tax deduction equal to the actuarial value of the charitable organization's remainder interest. Income of the pooled income fund is paid to the donor or other beneficiary for life based on the fund's annual rate of return and will be taxed to the donor. (Unlike remainder trusts, pooled income funds may not invest in tax-exempt securities.)
Estate and Gift Tax Consequences - The results are basically the same as with charitable remainder trusts. The donor's estate is entitled to an estate tax deduction if the interest in the pooled income fund is includible in the donor's estate.
Description - The donor transfers assets to a qualified charitable organization in return for the charitable organization's agreement to pay the donor or other beneficiary an annuity for life or a term of years. The starting date for the annuity payments can be deferred to increase the charitable deduction.
Income Tax Consequences - The transfer is treated as a "bargain sale" (part gift, part sale) for income tax purposes if funded with appreciated property instead of cash. The donor is entitled to an income tax deduction equal to the difference between the fair market value of the property transferred and the value of the annuity contract. Capital gains, if any, attributable to the sale portion of the gift are reported over the donor's lifetime, and a portion of the income received by the donor may be tax exempt.
Estate and Gift Tax Consequences - A gift tax charitable deduction is allowed for the difference between the fair market value and the sales price. Contributed property is removed from the donor's estate for estate tax purposes.
Remainder Interests in Personal Residences and Farms
Description - The donor gives a personal residence or farm, including a vacation home, to a charity and retains the right for the donor (or the donor's spouse or other beneficiary) to reside in the property for life. The charitable organization does not gain possession and full ownership of the farm or residence until termination of the retained life estate or estates.
Income Tax Consequences - The donor is entitled to an income tax deduction equal to the present value of the charitable organization's remainder interest, taking into account depreciation and depletion.
Estate and Gift Tax Consequences - A charitable deduction is available for the remainder value, and depreciation and depletion need not be considered.
Description - The donor transfers assets to a trustee directing payment of a certain amount to one or more charitable organizations for a term of years and reserves the remainder interest for the donor's children, grandchildren, or other individuals.
Income Tax Consequences - The donor is not entitled to an income tax deduction unless structured as a grantor trust with the donor taxable on the income of the trust in future years.
Estate and Gift Tax Consequences - If the trust is created during the donor's lifetime, the donor is entitled to a gift tax deduction equal to the actuarial value of the income interest payable to the charitable organization. If the trust is created at the donor's death, the donor's estate is entitled to an estate tax deduction equal to the actuarial value of the income interest payable to the charitable organization.
When The Gift Is Complete
General Rules
- A gift is complete when the gift has been unconditionally delivered to the donee and the donor's dominion and control over the property has ceased.
- Delivery to a third person (for example, the donor's stockbroker or lawyer) who is an agent of the donor (as opposed to the donee) is not sufficient.
Cash
- A charitable contribution of cash by check is effective when the check is unconditionally mailed or delivered, provided the check clears the donor's bank in due course (even if this occurs in the subsequent year).
- A contribution that is charged to a bank credit card is deductible in the year the charge is made.
- Delivery of the donor's own promissory note is not deemed payment, and the deduction is deferred until the note is actually paid.
Stocks and Bonds
- The gift is complete upon delivery of the endorsed certificate or bond to the charity or its agent.
- If delivery is by mailing and charity receives the gift in the ordinary course of the mail, the gift is complete and effective on the date of the mailing.
- Delivery to the issuing corporation, its transfer agent, or the donor's broker is not sufficient-they are agents of the donor.
- A transfer of securities registered in street name at a brokerage firm is complete when transferred on the books of the brokerage firm.
Real Estate
- A gift of real estate is complete upon the execution and delivery of the deed to the donee charity.
- Recordation of the deed is not required for the gift to be effective but can be the best evidence.
Other Personal Property
- For most items of tangible personal property (for example, a painting) the easiest way to complete the gift is to deliver the item to the charity in exchange for a receipt.
- Intangible personal property (for example, a royalty) requires delivery of some form of deed of gift or other assignment document.
- If the asset's governing instrument (for example, a life insurance policy or partnership agreement) provides that a transfer is not effective until the transfer is recorded with or approved by the home office or general partner, the transfer may be effective as between the donor and the donee upon delivery, but counsel should be consulted.
Gifts in Trust
- The date of transfer of the property to the trust (not the date of execution of the trust) is generally the date of the gift for tax purposes.
- In the case of certain intangibles, the execution of the trust may, depending upon the precise language used, be sufficient to make the gift effective at that time.
- A declaration of trust (as opposed to a trust agreement with a second party as trustee) may be considered an expeditious way of completing a gift, for example, at year end.
Special Assets And Techniques
Certain assets offer unique planning opportunities or require special attention:
- Life insurance, either existing or new policies;
- Stocks in a corporation involved in a tender offer or takeover;
- Artworks;
- Vacation property;
- Closely held business interests and S corporation stock.
Designing a particular technique to suit the donor is possible in most situations:
- Using a charitable remainder trust to increase the yield to the donor from his portfolio;
- Creating a deferred gift annuity arrangement to provide funds for retirement;
- Forming a private foundation or supporting organization to maintain control over the donated assets;
- Using a charitable lead trust to hold S corporation stock;
- Establishing a charitable remainder trust to provide income and protection to a surviving spouse;
- Making gifts in installments and splitting gifts between spouses to avoid limitations of the five-year carry-over rule.