The Metrics of Charitable Giving

December 5, 2013. To be fair to the Tax Code, it does try to balance encouraging charitable donations against exploitation. The consequence of that is while most people realize they are allowed some income deduction for charitable giving, they might not realize it is not always a dollar for dollar return. Certainly, there is an immediate and comparable estate tax benefit by giving to a charity, allowing a complete deduction for the purposes of removing assets from one’s estate. However, another incentive in the charitable planning landscape is the permitted income tax deduction. And without doubt, in a climate where the marginal rate for some has become much more oppressive in 2013, income tax awareness needs to be incorporated into any client’s plan.

One of the means of mitigating the effects of the marginal rate is through charitable donations, but there is a limit to the amount that can be deducted in any given year. While perhaps intertwined, the rules are not particularly complicated. If one is looking to donate cash or ordinary income property, and donates to what are generally termed public charities, there is a 50% limitation on the deduction allowance. Translated, an individual may deduct up to 50% of their contribution base, defined as adjusted gross income without regard to any net operating loss carryback for the year. This is the better of the two available deductions. If one donates to what we will loosely call private foundations or charities here, the deduction is capped at 30%. There are private foundations that can allow you a greater deduction, but the generalities used here at least serve the purpose of highlighting the considerations that need to be factored in charitable cash donations.

Now, if we want to donate something other than cash, the rules get a little stranger. When donating long-term capital gain property to a charity, a different set of rules apply. If donating to a public charity, you can choose to value the property at its fair market value for the deduction but can only claim a deduction in the aggregate of 30% of your contribution base. However, and we are assuming the property has appreciated here, if we use our adjusted basis as the determinant for the deduction, then we can claim up to 50% of the contribution base once more. If the donation is to a private foundation, you are limited to a 20% of the contribution base. There is slightly more to the rules in Section 170, but this at least gives a flavor. I should also not forget that even if one hits the 30% or 50% ceiling, the loss can be carried forward for up to five years, which is as valuable as time-valuation rules allow it to be.

The simple point here is the need to be aware of income considerations when making an estate plan. With an assortment of tools like CRUTs, CRATS, and Charitable Lead Trusts we should always be aware of the value – or lack thereof – in direct transfers serving to move assets out of the estate, and whether it better serves the client’s financial planning and moral aspirations.

To learn more about Goosmann Trust Law Counsel and the services we provide, visit our website at www.trustlawcounsel.com, email info@goosmannlaw.com or call 712.226.4000.