Posted by Sean Flynt on 2005-10-18
As the recovery from Hurricane Katrina began, Congress recognized that all American charities needed exra support this year and decided to change the charitable deduction rules for the rest of 2005. Retirement plan owners age 59 1/2 or older can now make a deductible IRA or retirement plan gift to qualified charities organizations, including Samford, prior to December 31, 2005. Generally, all cash gifts for the rest of 2005 will be deductible up to your full income. See details in the Q&A below:
Questions and Answers About 2005 End-of-Year Gifts
What is the new 2005 End of Year Gift concept? Congress wanted to help charities assisting in the Hurricane Katrina relief. Therefore, the Katrina Emergency Tax Relief Act (KETRA) allows unlimited gifts to Samford University or any qualified charity, up to a donor's total income until the end of 2005. Under Sec. 301(b)(1)(A), a "qualified contribution shall be allowed only to the extent that the aggregate of such contributions does not exceed the excess of the taxpayer's contribution base (as defined in subparagraph (F) of section 170(b )(1) of such Code) over the amount of all other charitable contributions allowed under such section 170(b)(1 )." Thus, a donor may usually make gifts up to 100% of adjusted gross income (AGI).
When is this 100% gift deduction rule applicable?
Qualifying cash gifts must be made between August 28, 2005 and December 31, 2005.
Which charities qualify for the 100% deduction?
Samford does, as do other public charities, generally.
Must the 2005 End of Year Gift be for Katrina relief?
No, if the gift is by an individual, but yes if it is by a corporation. A corporation may give up to 100% of taxable income for Katrina relief. An individual may make a 2005 end of year gift to Samford or other public charities for any purpose.
Which charities or gifts will not qualify?
With the new 100% gifts rule, there are several exceptions -- no private foundation gifts, no supporting organization gifts, no donor advised fund gifts and no gifts of property such as stock or land. It must be cash. Sec. 301(d)(2) creates an exception that states that a qualified gift "shall not include a contribution if the contribution is for establishment of a new, or maintenance in an existing, segregated fund or account with respect to which the donor (or any person appointed or designated by such donor) has, or reasonably expects to have, advisory privileges with respect to distributions or investments by reason of the donor's status as a donor."
How does this affect potential IRA withdrawal gifts?
When a person over age 59-1/2 withdraws funds from his or her IRA, the withdrawal will be included in the IRA owner's taxable income. Under the new 100% of income charitable gifts option, the withdrawn funds may be given in full to charity. The full gift will then be deductible. In addition, since the 100% deduction applies regardless of the gift source, withdrawals and gifts may also be made from 401 (k) plans, 403(b) plans or other qualified retirement plans.
Is the 2005 End of Year Gift different from the IRA Tax-Free Rollover?
Yes. During the negotiations between the House and Senate, the decision was made to delete the IRA Tax-Free Rollover from the Katrina Relief bill. The IRA Tax-Free Rollover did not pass. However, the 2005 cash gifts provision was then added to the Katrina Relief bill.
Is there a dollar limit to an IRA withdrawal gift? Good news - the IRA withdrawal and gift option is unlimited. A person can withdraw and give $1,000 or $1,000,000. The gift is limited only by the donor's AGI. Of course, by withdrawing funds from an IRA, the donor's AGI increases. The entire withdrawal may be a gift to charity and deducted with no Sec. 68 application (the 3% reduction in itemized gifts over $145,950 of AGI for 2005). However, the increased AGI may affect other deductions.
How should a donor make an IRA withdrawal gift?
The IRA owner should withdraw the desired amount this year and make the gift by December 31, 2005. Warning - some IRA custodians take two to three weeks to process withdrawal requests! IRA owners should make the withdrawal request by early December to allow time for processing by the IRA custodian. Donors must have the cash available and complete the cash charitable gift by December 31 to qualify.
With a large IRA withdrawal and then gift, will the donor receive a full deduction?
Yes, the withdrawal increases taxable income, and the gift reduces taxable income.
Are other income tax limits affected by IRA withdrawal gifts?
Usually, for higher income taxpayers, approximately 3% of itemized deductions are not allowed. For cash gifts to charity between Aug. 28 and Dec. 31, 2005, the 3% reduction does not apply to the charitable gift. 100% of the charitable gift is deductible. KETRA Sec. 301(c) creates an exception for qualified charitable gifts and notes, "So much of any deduction allowed under section 170 of such Code as does not exceed the qualified contributions paid during the taxable year shall not be treated as an itemized deduction for purposes of section 68 of such Code." It appears that the IRS will treat these cash charitable deductions as itemized deductions not subject to the 3% rule.
The probable cost of the 3% rule for donors with adjusted gross income over $145,950 is a loss of 3% of itemized deductions over that limit. Since most donors are not affected by the higher floors for medical deductions or casualty losses, the actual federal tax cost would be about 1 % of the IRA withdrawal gift. The donor and his or her CPA would need to consider this cost in deciding whether or not to make a major IRA withdrawal-gift this year. For donors with a strong desire to help Samford this 1% cost may not be a concern.
Will state income taxes be a factor?
There are four categories of state income taxes. First, several states (Florida, Texas, Nevada, Washington and others) do not have state income tax. Second, some states (such as Alabama) conform to the federal deduction rules so that the full 100% deduction may be permitted. Third, some states follow the federal 50% AGI deduction limit with a five year carry-forward. Fourth, some states may have less favorable rules for charitable deductions. For category two states, the CPA software companies are promising to ship updated software by the middle of October. However,
CPAs in all states should consider the state income tax effect of any gift over 50% of AGI.
Will there be other income tax effects?
There may be for some donors. When adjusted gross income is increased, deductions such as medical deductions or casualty deductions with "floors" to the deductible amount may be affected. It does appear that there will be no alternative minimum tax (AMT) impact on taxpayers who make cash gifts in 2005. If a donor is subject to AMT, the cash gift saves tax at the AMT rate, which may be lower than the taxpayer's regular tax rate.
Will there be a tax-free rollover option for IRA gifts in 2006?
There may be a tax-free IRA rollover option by the year 2006. The CARE Act of 2005 was introduced in both the House and Senate on September 28,2005. The Senate bill (S. 1780) was introduced by Sen. Rick Santorum (R-PA) and Sen. Joe Lieberman (D-CT). Co-sponsors include Senators Bill Frist (R-TN), Orrin Hatch (R-UT), Dick Lugar (R-IN), Daniel Inouye (D-HI), Jim Bunning (R-KY), Norm Coleman (R-MN) and Gordon Smith (R-OR). In the House, Acting Leader Roy Blunt (R-MO) and Rep Harold Ford Jr., (D-TN) introduced the Charitable Giving Act (H.R. 3908).
The CARE 2005 Act permits tax-free gifts directly from IRAs to charity for persons over age 70-1/2. Tax-free rollovers to gift annuities and charitable remainder trusts are allowed for IRA owners over age 59-1/2 (Senate) or over age 70-1/2 (House).
The CARE Act passed both House and Senate in 2003, but did not go to conference. With the enormous need for relief services after Hurricanes Katrina and Rita, there is new energy in the effort to pass charitable legislation. It is especially significant that the majority leaders in both the House and Senate (Rep. Blunt and Sen. Frist) are publicly supporting the CARE Act of 2005. Since Congress will be in session until December due to Katrina Relief legislation, Sen. Frist and Rep. Blunt have the power to schedule floor votes on the CARE Act during 2005.
With the possibility of passage of the CARE Act, donors contemplating large gifts with a 1 % tax cost may choose to wait until December. By that time, prospects for passage oft he CARE Act will have greater clarity. If there is no action on the CARE Act by December, then these donors and their advisors will need to consider the possibility of making a large gift in 2005, even with an approximate 1-3% tax cost. If passage of the CARE Act seems likely, then some donors may decide to wait until 2006 to make IRA charitable gifts.
Could you share some hypothetical IRA withdrawal gift scenarios?
Peter consistently supports Samford by giving 30% of his income each year. When he heard that Congress recognized the need to support all charities after Hurricane Katrina, he decided to cash one of his CDs and double his gift to 60%. Under the special 2005 rule, he will be able to deduct the full amount on this year's tax return.
Mary is a retired teacher who has supported Samford for many years. Throughout her career, she was able to save in a retirement plan and now lives comfortably. Mary's plan has grown substantially over the years, so she decided to withdraw $50,000 for a gift to Samford. Her gift will be taxed as income but will receive a 100% income tax charitable deduction. Mary will be able to make a once-in-a-lifetime gift to Samford beyond what she ever thought possible.
When Clara's husband passed away, she was beneficiary of his IRA, which she rolled into her own IRA for a combined value of $300,000. She also owns her home, some CDs and a few stocks which will pass to her children without income or estate tax. Because the children would have to pay tax on the IRA, Clara chose to name a "Give It Twice" trust as beneficiary. When Clara dies, the trust will pay income to her children for 20 years. Then, whatever is left will be her gift to Samford. Because Samford is a qualified charity, the trust avoids substantial future taxation. Clara is delighted that she found a way to save taxes for her children, provide for their future and help Samford, too. Her example is one of a future gift that allows you to use your IRA for your own retirement income. Income goes to children for 20 years, and what remains afterwards is given to Samford. She gave it twice!
These hypothetical examples do not constitute professional legal or tax advice. You should consult a tax advisor about your specific situation.
To learn more about IRA and retirement plan gifts for 2005 as well as other kinds of gifts, follow the link below.
IRS Circular 230 Notice: Federal regulations apply to written communications regarding federal tax matters. Pursuant to these federal regulations, we inform you that any U.S. federal tax advice in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.