By Andrew R.  Lee, Esq.

There is still time between now and the end of 2005 to make gifts to friends, family and charities.  If the gifts will be to public charities, then a newly enacted law has opened a short window of time to do extra gifting with added income tax benefits for the donor.

Newly Expanded Charitable Giving Opportunities

On September 23, 2005, President Bush signed the Katrina Emergency Tax Relief Act (KETRA) into law, which has temporarily enhanced the ability of individuals to take charitable income tax deductions for certain qualifying contributions made to public charities between August 28, 2005 and December 31, 2005. 

Contribution Base Goes from 50% to 100%  - Generally a donor can only take an income tax deduction for charitable contributions for a tax year up to 50% of his or her adjusted gross income (AGI).  However, certain charitable contributions made between August 28, 2005 and December 31, 2005 will qualify for a contribution base of 100% of the donor’s AGI.  For example, if someone has AGI of $200,000, and makes a gift of $180,000 to charity, normally that donor would have only been able to deduct $100,000 of that charitable contribution in the year of the gift (i.e., 50% of AGI), with the balance of the deduction being carried forward to future tax years.  However, under the new temporary rules, that donor could deduct the full $180,000 charitable gift for year 2005, if the gift was made between August 28, 2005 and December 31, 2005 and if it is a qualifying gift as further explained below.  

Coordination with Prior Charitable Donations Made in 2005 - If the donor has made other charitable gifts between January 1, 2005 and August 28, 2005, then these must be taken into account when determining the donor’s allowable deduction.  For instance, if the donor in the example above with $200,000 of AGI, had also made a gift of $40,000 to a public charity at the beginning of 2005, then the donor’s deduction would be limited to $200,000, and therefore, he or she would carry-forward the additional $20,000 of donations to be deducted in future tax years (i.e., $40,000 + $180,000 = $220,000;  $220,000 - $200,000 = $20,000 carry-forward).  Although the donor was not able to deduct all of his or her 2005 deductions, the new temporary law allowed the donor to deduct $200,000 of donations (i.e., 100% of AGI), rather than only $100,000 (i.e., 50% of AGI) which would have generally been allowed absent KETRA. 

What Can Be Donated – This new temporary rule, allowing 100% of AGI to be used as the base, rather than only 50%, applies only to gifts of cash.  Therefore, donors cannot give away other assets such as stock, bonds, or real estate to the charities and qualify for this new temporary rule. 

Who can be the Charitable Recipient – Under this new temporary rule, the recipient must be a public charity, and cannot be a private foundation, a support organization, or a donor advised fund.  Although this new temporary rule came into existence in reaction to Hurricane Katrina, the charitable contributions do not need to be made to organizations associated with hurricane relief.  Therefore, the charitable contributions can be made to public charities completely unrelated to hurricane relief efforts, and the donor may still qualify for the 100% AGI contribution base.

Use of Retirement Account Funds – If a donor takes distributions out of his or her traditional IRA or 401K, in order to make a charitable donation, this would increase the donor’s AGI, and thereby increase the amount that he or she could deduct as a charitable deduction for that year.  For example, if the donor had $100,000 of AGI for the year prior to taking any distributions from his or her IRA, and if he or she then withdrew $150,000 from his or her IRA, the donor’s AGI would go from $100,000 to $250,000.  If the donor made a gift of $250,000 to a public charity between now and December 31, 2005, then the full $250,000 would be deductible for year 2005. However, it is important to remember that if the account owner is under 59 ½, the withdrawal would be subject to the 10% early withdrawal penalty unless the account owner were a hurricane victim. 

Annual Exclusion Gifts

The IRS allows individuals to make “annual exclusion” gifts to friends and family members each year without creating a current or future Gift or Estate Tax liability.  For year 2005, individuals can give away up to $11,000 per recipient as an annual exclusion gift.  This will be increasing to $12,000 per recipient as of  January 1, 2006.  Married individuals can double up on these gifts by each making a gift to the same recipient, or by one spouse making the gift for both spouses. 

Taking Advantage of One Appraisal for Two Years

For gifts of property other than cash, stocks or bonds, the donor should have an appraisal prepared in order to determine the value of the gifts.  Since we are coming to the end of 2005, an individual who wishes to make a gift of such assets could obtain an appraisal valuing the assets as of the end of 2005.  That individual could then make gifts in December of 2005 and January of 2006, based on that same appraisal.  Since a good quality appraisal can be expensive, by doubling up the gifts, and using the same appraisal for the two separate years, the donor could get more value out of the cost of the appraisal.

Coordination with the Individual’s Advisory Team

This newsletter has been a simplified explanation current gifting opportunities as well as the deduction computations for charitable gifts.  Prior to making any gifts, it is important for the donor to seek the advice of his or her financial advisors, which would likely include his or her attorney, accountant, investment advisor or broker, insurance agent, and/or private banker.  The attorneys at Howard & Howard would be happy to assist as a member of any such advisory team to help ensure that the gifting is done in the most efficient and correct manner. 

Andrew Lee is a member of  the Estate and Tax Planning Practice Groups at Howard & Howard.  His practice focuses on tax planning for individuals and entities.   For more information, please  contact Mr. Lee at (248) 723-0389 or email at arl@h2law.com.

Copyright 2005 Howard & Howard Attorneys, P.C. This publication is intended to provide information only and does not constitute legal advice.