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Some giving strategies can be a tax gift to yourself
I have had the privilege and honor of serving on nonprofit boards and working with clients that supported many tax-exempt and charitable organizations. Donations or gifts are the lifeblood of those organizations.
For many donors, it is simply better to give than receive.
Giving USA recently issued its annual report on giving to nonprofit and charitable organizations in the United States. The amount of giving increased in 2015 to $373 billion, more than a billion dollars a day. This represented approximately 2.1 percent of Gross Domestic Product, which is slightly above the historical rate of giving (1.9 percent of GDP) in the United States.
The Giving USA report indicated that gifts by individuals accounted for $264 billion of the total. Other giving came from foundations, bequests and corporate giving. The amount spent on raising these funds likely increased, as it seems that my home mailbox has a continuous supply of solicitations for gifts.
Nearly a third of the funds given in 2015 were to religious-related entities or organizations. The next-largest group for giving is education related. Colleges and universities receive gifts from alumni, often for specific projects or initiatives as well as operating support.
And then there are other classifications, such as human services, health and the arts and humanities.
Individuals and corporations that make gifts to qualified charitable or nonprofit entities often may claim a tax deduction for the contribution, subject to specific limitations. The tax treatment or tax benefits often drive donors in making a gift of cash or property.
Gifts are often made with property other than cash. Many are familiar with making gifts of household gifts or clothing to a specific charity and claiming a deduction for the gift. Some donors make a gift of appreciated public securities that are held more than one year.
The advantage is that a deduction may be available for the fair market value of the public securities. The inherent built-in gain is generally not taxed when such a gift is made to a qualified charity.
So there is a double benefit: a deduction for the value of the securities and the avoidance of any tax on the inherent gain. There are some limitations tied to adjusted gross income and the type of qualified entity that receives the gift of the appreciated securities.
Given the stock market performance in recent years, many individuals who hold public securities are likely to have gains in many of their holdings. This may offer the ability for many to make such a gift and not actually use cash to fund it. This planning can be beneficial to the donor and the qualified entity receiving the gift.
Anyone considering such planning should review this strategy with a tax professional.
Another tax-advantaged giving opportunity for those over age 70.5 was made permanent in the Internal Revenue Code in December. Donors may transfer up to $100,000 a year of assets in an Individual Retirement Arrangement to a qualified entity while avoiding a taxable income inclusion to the donor for the amount transferred. This is often referred to as a Charitable Rollover IRA.
The transfer can also be considered as part of the required minimum distribution from the IRA. Rules specify how the IRA assets are transferred to the qualified entity to obtain the beneficial tax treatment.
Since the IRA distribution is not included in federal taxable income of the donor, there is no actual charitable deduction for the amount transferred.
For federal income tax purposes, the overall impact may be no different than if the amount was distributed from the IRA as a taxable distribution and then a charitable deduction claimed on Schedule A of form 1040. However, there may be a state tax benefit.
Michigan doesn’t provide for charitable deductions for determining Michigan taxable income. The starting point in Michigan is federal adjusted gross income. So, the use of this strategy may indirectly provide some state tax benefits since the distribution is not included in adjusted gross income.
Also, this tax provision may be beneficial if an individual has income or deduction limitations for federal tax purposes. Once again, a tax professional can analyze whether the provision suits an individual’s situation.
There are a number of other ways gifts can be structured in connection with estate and wealth planning, and many acronyms for the different techniques. Time and space don’t allow for discussion of those items here, but they can provide both tax benefits and non-tax benefits. The non-tax benefits are often the real driver of most giving to charitable and nonprofit organizations.
Most of these gifts do make a difference in the lives of others, and this is the real reward for the donors.
Bill Roth is a tax partner with the local office of international accounting firm BDO USA LLP. The views expressed are the author’s and not necessarily those of BDO. The comments are not to be considered specific tax or accounting advice. Readers are urged to consult their professional advisers.