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Column 15

Daily Camera

Enid Ablowitz

Charitable Incentives

With all the talk about tax incentives for giving, let’s be clear.  Most people do not make gifts just to save taxes. However, making gifts can result in charitable income tax deductions, allowing donors to leverage and potentially increase their giving.

The IRS Code has many provisions that make Uncle Sam your partner in giving, but the devil is in the details.  In previous columns, I’ve written about tax-wise giving and it is true, you can save taxes by strategically considering the timing of your gift and the asset you choose to give, however, particularly for larger gifts, it pays to understand some of the complexities.

• The charitable income tax deduction for your gift only applies if you itemize, however there is a provision in a bill under consideration that would allow non-itemizers a deduction as well.

• Your charitable income tax deduction savings is based on your tax rate:  the higher the rate, the more you save.

• There is a maximum charitable income tax deduction in any given year, based on your adjusted gross income (AGI).  The actual percentage (20%, 30% or 50%) depends on two things:  the asset you use (cash, stock, etc.) and the type of organization receiving the gift (public charity or private foundation.)  For example, you can make a cash gift (or write a check) to a public charity and receive an income tax charitable deduction equal to 50% of your AGI.  If you make a stock gift, the amount of the deduction is reduced to 30% of AGI.

• There is a provision that allows you to “carry-over” unused amounts of your charitable deduction.  This carry-over may be used for up to 5 years after the original year of the gift. Again, the % limits apply.  Suppose your AGI is $100k.  You make a $50k stock gift from your portfolio to your alma mater.  Since only 30% of your AGI is deductible in that year, the remaining $20k is carried over to the following year.  The excess deduction is not lost, just deferred. 

In the preceding example, there was a second component of a charitable partnership with Uncle Sam.  If the donor had sold the stock, the difference between her cost basis and the fair market value would be subject to capital gains tax.  By gifting appreciated stock, the capital gains tax is completely avoided. Thus, she is actually able to make a larger gift.

Donors need to understand that much of the marketing material to promote giving looks at best-case scenarios when showing tax savings.  What often is not shown are the limitations or pitfalls.  As we’ve just seen, a common misconception, for example, is that the entire charitable deduction is available in the year of the gift.  Not so, although you have up to five additional years to use the deduction. Another oversight is the impact of the alternative minimum tax which can have the effect of limiting the charitable deduction further.

There are many other giving “vehicles” that offer strategic giving opportunities.  Pooled income funds, charitable gift annuities, charitable remainder trusts, charitable lead trusts, life estate gifts, and others are touted as tax-wise mechanisms to broaden the options for giving beyond making an outright gift.  There are tax nuances with respect to each of these techniques that merit careful consideration.  Many donors find one or more of these agreements suit their needs for converting assets, producing an income stream, and transferring wealth.  All require careful consideration, and probable review by counsel.

As a donor, it pays to understand both the opportunities and limitations of charitable tax incentives.  Having a working knowledge of the rules, and using the code can free up even more charitable dollars.  Give wisely and often!

Send your questions about making charitable gifts to Enid Ablowitz, Features, Daily Camera, 1048 Pearl St., Boulder, 80302 or e-mail???/Fax????

Ablowitz, the Asst. Dean for Advancement at CU’s College of Engineering is a Certified Fund Raising Executive and has been working with donors for over a decade.  She is writing a book called Making Money Matter: 8 Steps to Thoughtful Giving.

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