Public Charities - Private Foundations
If a charity is classified as a private foundation (not an operating foundation) the tax rules for gifts and bequests to it may be different as compared to a gift to a public charity. For more information see the summary of the tax rules on the private foundation.
All other charities under Section501(c)(3) - except for the private foundation are classified as "public charities" for tax purposes and the rules in this report would apply. See Report Number One for the five kinds of charities under Section501(c)(3).
Charitable deductions are allowed only if the gift or bequest is made to a qualified charitable organization.
The Five Year Carryover Rule
Any gifts that are made which exceed the percentage allowed for deductibility in a particular year may be carried over for a period of five years for deductions in later years.
Gifts of Cash
These are deductible up to fifty (50%) percent of adjusted gross income.
Gifts of Publicly Listed Stock
If the stock is held long-term the deduction is for the market value with no tax due on the appreciation - - - deductible up to thirty (30%) percent of adjusted gross income - - - under an election of the donor the deduction can be up to fifty (50%) percent of adjusted gross income if the election is made to limit the amount of the deduction for all long-term property gifts during the year to cost basis.
As to public stock held only short-term, the deduction will be based on cost or current market value, whichever is lower, and will be deductible up to fifty (50%) percent of adjusted gross income.
Real Estate Gifts
If held long-term, deductible at market value with no tax on the appreciation up to thirty (30%) percent of adjusted gross income - - - donor can increase the ceiling to fifty (50%) percent by reducing the amount of the gift to cost basis. If real estate is held short-term, deduction is for cost basis or current market value, whichever is lower, up to fifty (50%) percent of adjusted gross income.
Any portion of the value that would be subject to recapture as ordinary income will reduce the charitable deduction.
Ordinary Income Property
Deduction allowed for cost basis or current market value, whichever is lower - up to fifty (50%) percent of adjusted gross income.
Tangible Personal Property
Such property, for example works of art, books, antiques which have been held long-term, a deduction is allowed for full market value with no tax on appreciation if use of the property is related to the exempt function of the donee, for example a gift of painting to an art museum - - - up to thirty (30%) percent of adjusted gross income (can be deductible up to fifty (50%) percent of adjusted gross income if deduction elected to be based on cost basis).
Deduction is for cost basis or current market value, whichever is less, when the gift is unrelated to the exempt function of the donee - - - up to the fifty (50%) percent of adjusted gross income.
If the property has been held short-term then deduction is based on cost or market value, whichever is lower, up to fifty (50%) percent of adjusted gross income.
Bargain Sales
This is a combination of a sale and a charitable gift and the contribution is the difference between fair market value and sale price of long term securities and real estate - - - cost basis must be allocated between property soldand property given and appreciation allocable to sale portion is subject to capital gains tax. NOTE: Outright gift of mortgage property is considered a bargain sale.
Partnership Gifts
The contributions are not deductible on partnership return but deductible by individual partners - - - ceiling on deductibility is ten (10%) percent of taxable income - - - basis of each partner's interest is decreased but not below zero (0).
Corporations
Ceiling on deductibility is ten (10%) percent of taxable income.
If corporation on an accrual basis can deduct gift on current return, if authorized, and then paid within two and one-half (2=) months after close of year.
Special gifts of inventory for ill, needy, minors - - - or gifts of some equipment to schools - - - deducted at cost plus one-half (=) of appreciation - - - or twice the cost - - - whichever is lower.
If a corporation is SubchapterS - all deductions passed through to stockholders in proportion to ownership of stock - - - subject to their individual percentage limits on deductibility.
Possible Reduction for Taxpayers Who Itemize
Taxpayers who itemize must reduce their itemized deductions (except medical, casualty, theft and investment interest) by an amount that equals three (3%) percent of adjusted gross income (over $126,600 for joint filers and over $63,300 if married filed separately - in 1999), this amount is adjusted annually for inflation - - - cannot reduce by more than eighty (80%) percent of the itemized deductions.
Fair Market Value of Donated Property
With respect to public stock, fair market value is the mean between the high and low value on date of delivery of the gifts - - - for mutual funds fair market value is redemption price.
For real estate and other property, the value is the price at which the property will change hands between a willing buyer and a willing seller and is determined by an appraisal. The cost of the appraisal is a miscellaneous itemized deduction subject to the two (2%) percent floor.
Substantiating Charitable Deductions
Appraisal and reporting requirements are strictly enforced, and as to gifts of property other than public stock, an independent appraisal is needed if the value is over $5,000 (over $10,000 for closely held stock) - - - for lower valued gifts, appraisal summary may be required without full appraisal.
For any gift over $250, donor must have written substantiation from the charity (including an estimate of value of any goods or services given back to the donor). Also, with respect to any gifts made to a charity over $75 for specific goods or services, quid pro quo gifts, charity must inform donor that gift deduction is limited to the excess of the amount given over value given back to the donor.
Volunteer Services and Expenses
No charitable deduction is allowed for any personal services rendered voluntarily - - - necessary expenses that are not reimbursed by the charity may be deductible.
No deduction allowed for rent free use of property to a charity.
Depreciable Property
With respect to deductions for any depreciable property, the amount of the deduction is reduced by what would have been taxed as ordinary income had the property been sold.
Estate Tax Deductions
Any portion of a person's estate left to any recognized charity under 501(c)(3) including all amounts left to private independent foundations are one hundred (100%) percent exempt from the federal gift and estate tax.
For taxable estates over $2,000,000 the federal estate tax will take forty-nine (49%) percent and for taxable estates over $3,000,000 the federal estate tax will take fifty-five (55%) percent of every dollar. The tax exemption currently in the year 1999is $650,000 and will increase periodically until it reaches an amount of $1,000,000 for the exemption in the year 2006. It should also be noted that under the unlimited marital deduction all amounts from an estate left to a surviving spouse who is a United States citizen are all tax deferred.
Pension Plans - Individual Retirement Accounts - Deferred Annuities and Other Income in Respect of a Decedent Assets
While pensions plans and deferred annuities are very beneficial investments during lifetime, when these assets are included in an estate that is subject to the federal estate tax, the tax results can be disastrous. Such an asset if included in a taxable estate may very well lose fifty (50%) percent or more of the value of the asset to the federal estate tax and then another thirty-three and one-third (33-1/3%) percent, more or less, to income taxes as the asset is paid out to beneficiaries. Designating a recognized charity as a beneficiary of such assets will totally avoid not only the federal estate tax, but will avoid all income taxes meaning that the charity receives one hundred (100%) percent of the value of the asset. If clients are considering giving to charity through an estate, these are the first assets that should be looked at.
Charitable Remainder Trusts
Under such a trust an asset is transferred to the trust (donor gets current tax deduction based on remainder value of the asset), the client (and a spouse) then can receive income from the trust at a designated rate for lifetime or a period of years, and after that the balance in the trust passes to charities named. All capital gains on the transfer of the assets to the trust are avoided and also all estate taxes that would have been due are also avoided.
Pooled Income Funds and Gift Annuities
The client who does not wish to be burdened with the detailed requirements and tax returns required by the charitable remainder trust can use a pooled income fund or a gift annuity to accomplish the same results. They are offered by many schools and large charities where the donor wishes to name that particular charity as the ultimate beneficiary. If the donor wishes to have the option as to which charities to name to receive the balance remaining, the Fidelity Investment Company offers a pooled income fund allowing the donor to name charities of choice.
Charitable Lead Trust
The charitable lead trust is just the opposite of the remainder trust. Assets are placed in the trust, a stream of income at a set percentage is paid annually from the trust to designated charities, and then the balance remaining in the trust either after a term of years or after lifetimes then returns to the donor, or in most cases to the children or heirs of the donor. The lead trust can save a substantial amount of the federal estate tax on passing portions of an estate to children.
Gifts of Future Interests in Real Estate
If a donor wishes to continue to use and enjoy real property such as a residence but then wishes such property to pass to a charity after lifetime, this can be done through a future interest gift. The rules are somewhat complex and the tax deduction will be based solely on the value of the future interest remainder of the property. Since the property will not be sold, there will be no capital gains taxes involved and also the value of the property will not be included in the donor's taxable estate.
Gifts of Future Interests in Tangible Personal Property
No federal income, gift or estate tax charitable deduction is allowed for gifts of tangible personal property (works of art, antiques, etc.) when the donor or close family member keeps a life estate with enjoyment or use of the property.
The Fidelity Charitable Gift Fund
The Fidelity Investment firm has introduced and established anew concept in charitable giving that has proved extremely popular. It was started in 1991 and has grown to over $1.5 billion of assets in the fund at the present time. Under this approach a donor is able to make a charitable contribution by making an investment in the
Fidelity Charitable Gift Fund and the fund establishes an account for the donor and then invests the funds in one of four different types of investments as chosen. The donor gets a current income tax charitable deduction for the value of the property transferred into the fund, and capital gains taxes are avoided on any sale of the asset. The donor then in the future is able to name, at his or her own pace, the charities to receive portions of the fund from time to time and the Fidelity Investment firm takes care of the all of the administrative details.
The Community Foundation - Donor Funds
Another option for the donor who does not wish to be troubled with the administrative requirements of a charitable remainder trust or a specific foundation, private or public, can use a community foundation and establish a donor fund. The foundation will do all of the administrative work of the investments and will be guided, although not controlled, by the suggestions of the donor as to the charities to be benefited. Donor funds can also be established for the benefit of specific charities, groups of charities, or specific charitable purposes.
Report prepared by The Foundation Law Center
Robert O. Doucette, Attorney at Law