Tax Details

Keep in mind that most prospects are motivated to make gifts because they believe in the mission of the charity, not because of the income tax benefits a gift affords. However, once a donor commits to a gift, he or she wants it to be tax efficient. When the IRS Discount Rate goes down, it impacts several different types of planned gifts:

Charitable Gift Annuity: When the discount rate goes down, the income tax charitable deduction also goes down. However, the lower the discount rate, the higher the tax-free return of principal from the gift annuity. For donors who do not itemize deductions, you generally select the lowest discount rate of the last three months to maximize their tax free income. For those who do itemize, you normally select the higher discount rate. When rates are historically low, you non-itemizers benefit. Keep in mind that for younger gift annuitants and those using deferred gift annuities, flexible gift annuities and deferred gift annuities that you may have to lower the payout rate in order to issue a gift annuity, since the minimum remainder required by the regulations may not be met at normal payout rates with a low discount rate.

Charitable Remainder Trusts: As with gift annuities, when the discount rate goes down, the income tax charitable deduction also goes down, making CRATs and CRUTs less attractive, particularly when compared with gift annuities which provide additional tax-free income in a low discount rate environment.

Retained Life Estate: Lower discount rates also lead to higher income tax charitable deductions when a donor makes a gift a real estate while retaining the right to the use of the property under a “retained life estate” arrangement. Right now is a great time to be talking to your loyal donors about the vacation home that they still enjoy but their kids do not want. If they donate the property subject to a retained life estate, they benefit from a significant income tax deduction right now but nothing else really changes until they pass, when the charity takes over the property.

Charitable Lead Trusts: Now is the IDEAL time to suggest charitable lead trusts to your prospects. When the discount rate is low, it allows your donors to maximize the amount passed to children, grandchildren or others gift and estate tax free while supporting your charity right away. For the mega-wealthy, using a lead trust together with the $5,000,000 gift tax exemption (which expires in December 2012) allows them to get even more to children or grandchildren without paying any federal transfer tax. If you have not approached your principal gift prospects with this strategy, you NEED to do so right away.

While the low discount rate may make it difficult to offer gift annuities to younger donors and reduce the income tax deduction in a few cases, it also has many benefits which you can use to your advantage.

Thanks for asking.

The Senate did not pass the IRA charitable rollover legislation this year, and probably won't. 

Here's the latest news: On June 24, 2010, the Senate bill that proposed extending the IRA charitable rollover through the end of 2010 (H.R. 4213) was taken off the table by Senate leaders. With other legislative priorities, and a general lack of cooperation in Washington, it is now highly unlikely that the IRA charitable rollover will be extended or enacted during 2010. 

(Please try not to confuse this failed IRA charitable rollover legislation with the 2010 traditional IRA to Roth IRA legislation, which did pass.  That legislation is also explained in our answers section.) 

Last year: During each of the past four years, 2006 - 2009, Congress had allowed donors to make tax-free gifts from their IRA Accounts. During that time, donors who were at least 70½ could make tax-free gifts totaling up to $100,000 each year from their traditional IRA to qualified charities. This was not that good of a deal for most donors, who could have accomplished the same tax outcome by accepting their IRA income and writing a check for the same amount to charity.  And most charities received a very small portion of their philanthropic income through this type of transfer. However, it had been a welcome loophole for people who already deducted 50% of their adjusted gross income (AGI) or who faced other limitations tied to AGI, because these gifts were not counted as income in any way, and individuals could in effect avoid receiving their IRA minimum distributions. 

What can a donor do?  An individual may still instruct an IRA plan administrator to make a direct contribution to a favorite charity.  If a retroactive IRA charitable rollover law is passed, then this gift may qualify in accordance with the new law.  However, it is more likely that any gift from an IRA account will be treated just like any other charitable gift.

Like a deduction for mortgage interest, the deduction for a charitable gift reduces donors' income that is subject to tax (their adjusted gross income or "AGI").  It is not a direct subtraction from the income tax itself.

Note: If a donor asks you, "How much will this gift save me in taxes?" you can give a shorthand answer by multiplying the charitable deduction by the top tax rate which the donor pays.  As an example, a charitable deduction of $10,000 claimed by a donor in the 35 percent bracket will reduce that donor's tax bill by $3,500.

*Property of any kind that the donor has held for less than 1 year is considered short-term capital gain (or "ordinary income") property by the IRS, and its value for deduction purposes is limited to the donor's cost basis.

No, the IRS says that establishing the FMV (fair market value) of any gift asset except cash, publicly traded securities or mutual fund shares is the responsibility of the donor, through the services of an independent appraiser.

Closely!   Donors must file IRS Form 8283 ("Noncash Charitable Contributions") if the amount of the total charitable deduction they are claiming for all noncash gifts is more than $500 for the year.  If one item of donated property, or a group of similar items, exceeds $5,000 in claimed value (unless the property is publicly traded securities), donors must also summarize on Form 8283 the appraisal they obtained on that property.  The appraiser and a representative of your organization must also sign that appraisal summary. 

If, within 3 years of the date of the gift, your organization sells or disposes of donated property for which the donor claimed a deduction of $5,000 or more (except for publicly traded securities), you must file a separate report to the IRS, Form 8282 ("Donee Information Return").  You state the donor's name, identify the property, and tell when you received the property, when you disposed of it, and what proceeds, if any, you received on the disposition.

You can download Form 8283, its Instructions, and Form  8282 plus Instructions here.

Caution: The requirements that the IRS places on donors to substantiate charitable deductions for property gifts are complicated - we've just given you a summary here - and there are penalties for non-compliance.  As your non-profit's representative, be careful about providing any advice to donors about compliance, and urge them to consult with their own advisors before making a property gift.               

• One portion of the payment will be considered return of principal by the annuity, and thus tax-free to the beneficiary. If the donor funded the annuity with appreciated property, a second portion of the payment will be taxed at low capital gains rates. The balance of the payment will be taxed as ordinary income. This favorable tax treatment, not available on other types of life-income gifts, increases the effective yield of a gift annuity.
• If the beneficiaries live beyond what their life expectancies were at the time the gift annuity was created, subsequent payments to them will be taxed entirely as ordinary income.
• If the gift annuity is funded with appreciated assets, the donor does not have to pay capital gains tax at the time of the transfer. Only a portion of the capital gain in the donated assets is recognized, and the tax will be spread over the annuity payments, as described above.

Yes.  RLEs do require Form 8283 with the signature of an appraiser.  The donor pays for the appraisal, not the charity.