The Nonprofit FAQ

The Tax Implications of Planned Giving
All of the recent wonderment at the Grand Opening of the Seattle Symphony Orchestra’s Benaroya Hall, the sophisticated but ultimately unavailaing cancer treatment for Seattle School Superintendent John Stanford at the Fred Hutchinson Cancer Research Center and countless other achievements of non-profit organizations in the Pacific Northwest serve to remind us that the quality of life we prize here comes with a cost. In large part, that cost is borne by private individuals who contribute their own personal resources to keep those organizations financially healthy.

Serious thought is being given right now to the future of non-profit organizations in the Northwest and whether the rather unique regional ethic of financial and in-kind support for such organizations will continue. Most signs are that it will. But in the process of giving personal resources to worthy non-profits, individuals should know what large corporations know, and that's that your government will help ease the burden of charitable giving.

There are some basic rules and tax assumptions governing charitable giving that can help both the individual and the corporate philanthropic giver, as well as the charity of your choice. Let's take a look at the ABCs of gift planning.

Eligibility for a Tax Deduction



In general, a gift to a qualified charity warrants an income tax deduction. The value of that deduction depends on your income tax rate. The greater your income, the higher your tax rate and the amount the government takes from you in taxes. But what the government taketh, the government giveth back — or at least is willing to give back, as long as you take a tax deduction.

In order to get a tax deduction, it is necessary that the contribution be made to a "qualified charitable organization." However, not all worthy causes that you might like to support financially have been officially designated by the Internal Revenue Service (IRS) as qualified. The IRS determines tax qualification after an organization makes an application. You can give to any organization you want, but you can only take a tax deduction for gifts to an organization that has IRS recognition. How do you know? You can get IRS Publication 78, which lists all of the qualified organizations. Or you can ask the charity for a copy of their approval letter from the IRS that designates them as a Section 501(c)(3) organization.

[The list of recognized 501(c)(3) organizations is available online at the IRS website -- see http://www.irs.gov/charities/article/0,,id=96136,00.html —Ed.]

Lesson No. 1 -- Before giving, be sure the charitable organization is qualified. If it's not, the IRS will not allow you to deduct your contribution.


Sometimes, Timing Is Everything



For many people, income varies from year to year. In some cases, it varies a lot. Let's say you know that your income will be substantially greater in 1999 than it is in 1998. Along with a higher income tax rate, your income tax savings from your gifts would be larger, too. For example, if your tax rate is 28 percent in 1998, but next year your tax rate is expected to be 39.6 percent (the highest rate), your $10,000 gift to a charity on Dec. 31st will save you only $2,800 in 1998 taxes. But, making the same donation one day later on Jan. 1, 1999 will save $3,960.

Lesson No. 2 -- If your income varies from year to year, give during the 'good' income years.

Can I Cash Out Stock to Make A Gift?



Sure you can. But the real question is whether you should. Suppose you would like to give $100,000 to a charity, but in order to get the money to do so, you would need to sell 1,000 shares of stock that you originally purchased for only $10,000. If you sell the stock to get the funds, you'll be taxed on the $90,000 gain. A far better alternative is to just give the shares of stock directly to a charity.

The IRS will allow the full $100,000 fair market value as a deduction and will not tax you on the gain in stock value.

Lesson No. 3 -- If you have appreciated securities, you will get the full benefit of their value as a deduction if you give them to a charity and will avoid the income tax that would be due if they were sold. Even if you have the cash to give -- the gift of appreciated stock is usually a much better deal for you.

What If I Want to Give Valuable Items?



You can do that, too. The IRS's rule is that such gifts of property must be supported by a "qualified appraisal." The appraisal, and some additional forms, must be attached to your tax return if the value of the item given exceeds $5,000. As was the case with the gift of appreciated stock, the difference between your purchase price and the item's value on the date it is given is not treated as taxable gain to you.

There are some exceptions to the rule allowing a full deduction for property value without taxing appreciation in value, so you'll want to run your plans by your tax advisor before proceeding.

There Are Limits



The limit that can be deducted in any year is usually 50% of your adjusted gross income (gross taxable income minus certain taxable deductions). However, if the amount you give in a year exceeds this limitation, you can carry the excess over to future tax years (up to 5 years) and deduct a portion of it during each of those subsequent years. Also, for gifts of certain kinds of property or for gifts to certain organizations, the annual limitation is only 30% of the donor's adjusted gross income.

Death and Taxes



Let's say you don't want to make contributions now, but you would be willing to leave an amount to charities in your will. If this is done, your taxable estate and estate tax is reduced, possibly saving a lot in taxes. Taxes can eat up as much as 55 percent of the value of an estate. If your estate would be in the 55% tax bracket, a gift to a charity in your will of $100,000 would save $55,000 in estate taxes. For many people, this reduction in estate taxes is an important objective. But other people are willing to give substantial portions of their estates directly to the government, such as wealthy immigrants who are simply grateful for the chance America has given them. The point is that it’s your choice. If you do nothing, the government will surely exercise its choice.

Keep in mind, however, that a gift today automatically reduces your estate -- so the current savings on your income tax is a bonus for giving today that you would not enjoy if you put off the gift to a time after your death.

Lesson No. 4 -- It's often better to give sooner (and get an income tax deduction) rather than later (and have your estate enjoy only an estate tax benefit).

The Pension Plan: An Exception to the Sooner Rather Than Later Rule



If you want to give to charity from your pension plan account or IRA, you can save both income and estate tax by waiting to make these gifts through your will. This is possible because, even after your death, whoever receives the pension or IRA money will also have to pay income tax unless the recipient is a charity. So, if you've already provided well for any family members, a post-death gift of a pension or IRA to a charity reduces the estate (for estate tax purposes) and avoids the income tax that your heirs would have to pay upon receiving these accounts.

It would be very wise, however, to get advice from someone sophisticated in this area. It calls for the coordination of your will with the beneficiary designations for your pension or IRA. Also, choosing a charity/beneficiary can increase the minimum required distributions from your pension or IRA that must be taken out after you reach the age of 70 1/2.

Whether you want to give to a symphony, a health care organization, a social services agency or some other worthy charity, it's important to know that your government is willing to help.



David Keene, CPA, is President of Keene & Company, a certified public accounting firm specializing in estate and trust work, retirement planning, tax strategy and accounting services. The firm also provides professional counsel for closely held small business executives. The Seattle-based firm was established in 1987.

David Endicott is a public affairs consultant in Seattle and a member of non-profit boards of directors that accept private contributions, including the Seattle Symphony.



Posted 5/24/99-- PB