Giving Incentives from the IRS

Have you ever thought of the government as a partner in giving? Well, whenever money is involved, so is the IRS. In the case of making gifts, while there are lots of rules, there are ways to leverage them to your best advantage.

First, let’s explore giving to family. There’s been a lot in the press recently about death or estate taxes, which are actually transfer taxes that apply to all gifts made, even during your lifetime. How much you give, to whom and when, determines whether your giving is a taxable event.

To family, heirs and other individuals:

You can give up to $10,000 per person per year with no taxable consequences. Example: Mr. And Mrs. Comfortable have 2 married children and 4 grandchildren. If Mr. Comfortable and Mrs. Comfortable were to take advantage of this tax-free wealth transfer strategy, they could each make gifts to each child, each spouse and each grandchild, effectively transferring $160,000 with no gift or transfer taxes due, and they could do this every year.

In addition to the $10,000 exemption, an individual can give up to $675,000 over his or her lifetime or at death with no gift or transfer (estate) taxes due. This limit is increasing and will reach $1,000,000 per person by 2006. There’s continuing political pressure to increase this amount and effectively eliminate the transfer tax altogether. (The issue is complicated by several factors, both philosophical and practical, but you can be sure the estate attorneys will not be unemployed!)

Remember that there are never transfer taxes due between spouses. However, each person’s ability to shelter their personal lifetime exemption dies with them, so good estate planning is needed to create “shelter” or “bypass” trusts to take full advantage of the law and protect both partners’ estates from unnecessary taxation.

To qualified non-profit organizations:

Perhaps surprisingly, the government actually subsidizes our charitable giving. The IRS encourages giving to non-profit organizations by providing charitable deductions for most gifts. The calculations can be complex, but there are some basics you should know.

If you itemize and make a qualified charitable gift, the IRS allows you a charitable deduction for up to 50% of your adjusted gross income if you give cash. If you give appreciated assets, the percentage drops to 30%.

If you do give appreciated assets, there are ways to avoid paying capital gains. By making stock gifts, for example, you can get a charitable deduction on the market value, and since you are not selling the asset, no capital gains tax is due. The net cost of making the gift is significantly reduced.

Charitable deductions can be used over a period up to 6 years. If you exceed the amount you can use in a given year, you can carry-over the deduction each year until it is used.

You can make a bequest to a non-profit with no tax consequences other than reducing the size of your estate and possibly lowering your transfer tax rate for the remainder of your assets as they pass to your heirs.

Here’s a simple example of the IRS partnering in your philanthropy:

Ms. Successful had responded to a local organization’s fund-raising campaign and has decided to make a major gift of $25,000. She determines that she is in the 36% marginal tax bracket based on her adjusted gross income of $156,000. She decides to use appreciated stock to make her gift, and calculates that she is well within the 30% limit for a charitable deduction. The stock she selects is one that she purchased 5 years ago for $15,000. The transaction would be subject to a tax of $2000 based on 20% of the $10,000 gain, if she were to sell it. With her charitable deduction based on the fair market value of $25,000, she saves an additional $9000 in taxes (36% of $25,000). The net cost of her gift is $14,000.

Next time you think about gifting, be sure you take full advantage of the tax laws. Be tax-wise in thinking both about inheritance and philanthropy.

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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