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Tax Details

These pages are technical in nature. We’re mostly a marketing firm, and although we cover tax details, it is not our main focus.

“A donor of ours filled out the Charitable Remainder Unitrust Calculator via the Virtual Giving segment of our website and the results showed an IRS Discount Rate of 1.2%. That IRS Discount Rate was correct for July 2012, but the current correct rate (for September) is 1.0%. Do our DonorCalcs need to be updated, or is there a reason why they reflect a higher rate?”

“A donor of ours filled out the Charitable Remainder Unitrust Calculator via the Virtual Giving segment of our website and the results showed an IRS Discount Rate of 1.2%. That IRS Discount Rate was correct for July 2012, but the current correct rate (for September) is 1.0%. Do our DonorCalcs need to be updated, or is there a reason why they reflect a higher rate?”

“How will variations in the IRS Discount Rate affect my planned giving program?”

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: 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.

“Can your organization determine the fair market value of a gift of property for the donor?”

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.

“What is the deduction for a gift of property like artwork, books, equipment, etc.?”

If your organization can use the property to further your tax-exempt functions (also known as putting it to a “related use”), the deduction is the fair market value of the asset.  However, if you cannot use the property, or if the donor instructs you to liquidate it and use the cash proceeds, the deduction will be limited to the donor’s cost basis in the asset.

Note:  The broader your organization’s charitable functions, the more “related uses” can be found for gifts of personal property.  A college, a library, a museum and a hospital, for instance, could all put a painting to good use, even if it wasn’t the same use.  Non-profits with more narrowly focused missions, on the other hand, may be hard-pressed to find a use for a proposed gift of personal property.

“How is the value of a non-cash gift determined?”

Type of PropertyValuation Method*
Publicly traded securitiesMean of high and low selling prices on date of gift
Mutual fund sharesClosing redemption price on date of gift
Closely held stockIndependent appraisal if worth $10,000 or more
Real estateIndependent appraisal if worth $5,000 or more
Artwork, collectibles, etc.Independent appraisal if worth $5,000 or more

*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.

“Can donors apply all of their charitable deduction against their taxable income?”

Yes, but – the IRS does not permit taxpayers to offset their entire adjusted gross income (AGI) in one year via a charitable deduction.  Accordingly, these restrictions are in place:

  • If donors use cash or short-term capital gain property (stock or other assets held for less than one year*) to fund their gift, they can apply their deduction up to 50 percent of their AGI in the year they make their gift. *Remember: the charitable deduction for short-term capital gain property is the donor’s cost basis in the property, not its fair market value.
  • If donors use long-term capital gain property for their gift, they can apply their deduction up to 30 percent of their AGI that tax year.
  • All of a donor’s charitable gifts for the tax year are added together and the total is applied against those percentage limitations.
  • A charitable deduction in excess of the percentage limitation may be carried over and used up through five tax years after the gift was made. In other words, donors have six years to fully use a charitable deduction.
Example 
Donor’s Gift:$40,000 in securities owned longer than one year
Charitable Deduction:$40,000
Donor’s AGI:$100,000
% Limitation for Deduction:30% of AGI for gifts of long-term capital gain property
$ Limitation for Deduction:$30,000 this tax year
Amount Carried Forward:$10,000, to be claimed over the next 5 tax years

(If Donor had used cash instead of stock to fund her gift, her $40,000 deduction could have been applied against 50 percent of her AGI ($50,000) and thus claimed entirely in this tax year.)

“How does a charitable deduction lower a donor’s income taxes?”

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.

“What tax deduction do donors receive for a planned gift?”

It depends on the asset used to fund the gift, whether the gift was made during the donor’s lifetime or at death, and whether the donor retained an income interest from the gift.  Here are the guidelines:

  • Outright, lifetime gifts of cash, or of assets like securities held by donors for more than 1 year (“long-term capital gain property”), are deductible at fair market value.
  • The charitable deduction for a gift that returns income to donors and/or other beneficiaries, such as a charitable gift annuity or a charitable remainder trust, is the fair market value of the gift asset minus the present value of the income interest retained.
  • Revocable gifts that will be paid to your organization upon the death of the donor do not generate an income tax deduction. Therefore, donors do not receive a deduction for including a charitable bequest when they write their will, for naming you the beneficiary of a life insurance policy, or for designating your organization to receive the remaining balance of their retirement plan.

“How does a donor verify a deduction for a gift of property?”

Except for publicly traded securities, gifts of property worth $5,000 or more ($10,000 for shares of closely held stock) held by donors longer than 1 year must be appraised in order to establish their fair market value (and thus the charitable deduction donors may claim for the donation).  Appraisals must be obtained by the donors and not the recipient charity, and must also be obtained for the purpose of valuing the gift (in other words, insurance appraisals are not acceptable).  Donors are required to get their appraisal not earlier than 60 days before they make their gift, and not later than the due date for the tax return on which they are claiming their deduction.

“How does the IRS monitor gifts of property?”

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.

“What are the tax benefits of a life-income gift?”

First, the donor receives a charitable income tax deduction for the full, fair market value of the assets contributed, minus the present value of the income interest retained.

Second, if the donor uses appreciated property to fund the gift, no upfront capital gains tax is applied to the transfer, meaning that the entire amount donated can be put to work earning income for the donor.

(Our handy Planned Giving Pocket Guide describes all planned gifts.)

“How are payments from a gift annuity taxed?”]

  • 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.

“Does a donor need to file Form 8283 for a retained life estate (RLE)?”

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

“I need a quick reference guide on the details and funding options for planned gifts. Help!”

You’ve come to the right place.  Purchase The Ultimate Quick Reference Planned Giving Pocket Guide that also comes with a fold-out “cheat sheet” titled When How and Why to Plan a Gift. At $29.95, it’s a bargain. (Quantity discounts available.)

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