How to Give/Tax Advantages
Whether you choose to make a one-time donation, a recurring gift, or a planned gift, your generosity will allow the Bonnie J. Addario Lung Cancer Foundation to continue to advance the eradication of lung cancer through early detection, reasearch, education, prevention, and treatment. And…there are tax advantages!!!
TAX ADVANTAGES OF CHARITABLE CONTRIBUTIONS TO THE BONNIE J. ADDARIO A BREATH AWAY FROM THE CURE FOUNDATION (BONNIE J. ADDARIO LUNG CANCER FOUNDATION)
While most people who make charitable contributions do so out of the selfless motivation to make the world a better place in which to live, donors should be aware of the different tax advantages in making charitable donations so that they are able to structure their charitable giving for the maximum tax advantage.
Tax policy as set forth in the Internal Revenue Code and regulations, and in state tax laws, encourage charitable contributions by providing deductions against income and estate taxes that can provide financial advantage to the donor as well as to the charities to which donations are made. Looked at in this way, every taxpayer is a “donor”: he or she can either “donate” all of one’s tax dollars to the IRS and state taxing authorities, and let the federal and state governments decide how such “donations” should be spent. Or, a taxpayer can give enforceable, specific instructions as to how some or all of his or her “donations” are to be spent by making charitable contributions to qualified charitable organizations.
Make Certain Your Charitable Donations Are Directed to “Qualified” Organizations (BJALCF is qualified)
The income and estate tax deductions that are available for charitable donations are dependent upon such donations being made to qualified charitable organizations. Most qualified charitable organizations are listed in IRS Publication 78, Cumulative List of Organizations. This list can be accessed on-line at http://irs.gov . The list has a user-friendly search engine that can be used to identify whether an organization is a qualified charity. A search for the charitable status of the Bonnie J. Addario A Breath Away From the Cure Foundation can be easily accomplished by accessing the following link: http://irs.gov/app/pub-78/ . Once there, type in “Bonnie J Addario” under the “Organization” heading; click the “All of the words” box; then press “Search.” You will see that the Bonnie J. Addario A Breath Away From the Cure Foundation is a qualified public charity. (The lack of a “code” number on the search report means that the Foundation is a public charity, providing the most favorable tax deductibility for contributions made to it.)
Once you have identified an organization as a qualified charity, the tax advantages which result from a contribution depend on (1) whether the donor is seeking an income tax deduction or estate tax deduction, and (2) the type and value of the asset being contributed.
Income Tax Advantages of Making Charitable Contributions
Contributions to the Foundation are available to all taxpayers who itemize their deductions: that is, those whose mortgage interest, state income and property taxes, charitable contributions, and eligible miscellaneous expenses exceed the “standard deduction” automatically granted to taxpayers ($4,850 for single taxpayers, and $9,700 for married taxpayers). Charitable contributions are reported on Schedule A of Form 1040. Cash donations to the Bonnie J. Addario A Breath Away From the Cure Foundation are deductible up to 50% of a taxpayer’s adjusted gross income. In other words, a taxpayer whose adjusted gross income is $200,000 may make a fully deductible charitable contribution to the Foundation of up to $100,000. (And, if you want to exceed the 50% deductibility limit, don’t worry! You can carry forward unused charitable deductions for five additional years.)
The income tax advantages of a charitable donation can be illustrated by the following example. Suppose a taxpayer is in the 33% federal income tax bracket, and the 9% California income tax bracket. A $15,000 charitable contribution to the Bonnie J Addario A Breath Away From the Cure Foundation will result in a $5,000 reduction of federal income taxes, and a $1,350 reduction of state income taxes, for total tax savings of $6,350.
Should you make a charitable contribution in excess of $250, the Foundation will provide you with the necessary documentation to support the deduction on your income tax returns.
Tax Advantages of Making Non-Cash Donations to the Foundation
Tax deductions are also available for donors who donate non-cash assets to the Foundation, like stocks or other securities. A taxpayer may deduct the fair market value of stock donated to the Foundation, provided the stock has been held by the taxpayer for at least one year (though the deduction is limited to 30% of adjusted gross income). The advantage of donating appreciated securities to the Foundation is that one can avoid the capital gain tax liability that would otherwise be incurred if the stock was sold.
For example, if you were to make a donation to the Foundation of stock which you purchased 10 years ago for $1,000 but which is now worth $50,000, you would be entitled to a charitable deduction of $50,000. If you are in the 33% federal income tax rate and 9% California income tax rate, this would result in federal tax savings of $16,667 and state income tax savings of $4,500, for total tax savings of $21,167. And, by making the gift of stock rather than first selling the stock and gifting the sales proceeds, you avoid federal and state capital gains tax of $11,270.
The Foundation can readily accept stock donations. However, the Foundation may not be able to readily accept the donation of other non-cash items (for example, the Foundation cannot accept car donations), and the tax deductibility resulting from the donation of other non-cash items is more complicated. So, please contact the Foundation if you have an item you would like to donate to the Foundation, so that the advantages and disadvantages of such donations can be explored in greater detail.
Tax Advantages of Making Donations Directly From IRAs
If you are over age 70-1/2 and own one or more Individual Retirement Accounts (IRAs), special legislation extended through 2009 allows you transfer up to $100,000 to the charity tax-free without the charitable deduction limits associated with cash contributions. Such a transfer counts towards your requirement to withdraw your minimum required distribution from your IRAs, and does not have to be taken into income (though no corresponding charitable deduction is available against your other income tax liability).
The legislation permitting direct IRA transfers to charity is due to expire on December 31, 2009, though we are hopeful that it will be further extended into the future.
Estate Tax Advantages to Making Charitable Contributions to the Foundation
Remembering the Bonnie J. Addario A Breath Away From the Cure Foundation in your will or trust can provide significant estate tax savings to your beneficiaries. Bequests to charities like the Foundation are fully deductible against the federal estate tax, and there is no deductibility limit as there is for income taxes. And, because estate tax rates can be as high as 45% (55% in 2011 and beyond), the tax savings generated by charitable bequests are correspondingly greater.
The estate tax savings generated by charitable bequests can be compounded by funding such bequests from assets – primarily, retirement accounts – that are subject to both estate and income taxation. These savings can be illustrated by the following example: Suppose Mother Smith has an estate valued at $5 million, of which $1 million is made up of an IRA. If Mother Smith leaves her entire estate to her children, the children will be faced with an estate tax liability of between $675,000 (if she dies in 2009) and $2,045,000 (if she dies in 2011 or later). In addition, the children will have to pay income tax on the inherited IRA as it is distributed to them of approximately $155,000. So, total taxes that must be borne by the children would be from about $830,000 to as much as $2.2 million.
If instead Mother Smith provides a $1 million bequest to the Foundation, estate taxes are reduced by between $450,000 (if she dies in 2009) and $550,000 (if she dies in 2011 or later). And, if the charitable bequest is funded with the IRA, there is additional income tax savings of approximately $155,000, for a total of $605,000 to $705,000 on a $1 million charitable bequest.
Other Sophisticated Strategies for Charitable Giving
Charitable Lead Trusts
Historically low interest rates provide an outstanding charitable and estate planning opportunity through the use of Charitable Lead Trusts. A Charitable Lead Trust provides a certain stream of income to a designated charity for a defined term of years; at the conclusion of the Charitable Lead Trust term, the remaining trust balance is paid to designated non-charitable beneficiaries (like children and grandchildren).
Charitable Lead Trusts can be extremely advantageous to both charitable and non-charitable beneficiaries – particularly in times of low interest rates – because successful investment of the amounts contributed to a Charitable Lead Trust will produce exceptional returns to the non-charitable beneficiaries, often free of gift tax. For example, assume you transfer $1 million to a Charitable Lead Trust in January 2009, and direct that $63,000 be paid to charity every year for 20 years. Assume at the same time the funds contributed to the Charitable Lead Trust achieve an 8% annual rate of return on investment throughout the life of the Charitable Lead Trust. At the end of 20 years, charity would have received 20 distributions of $63,000, or a total of $1,260,000. And, at the end of 20 years, the non-charitable beneficiaries will receive almost $1.7 million, free of gift and estate tax.
Charitable Remainder Trusts
A Charitable Remainder Trust is the functional opposite of a Charitable Lead Trust: non-charitable beneficiaries (which can include the donor and the donor’s spouse) receive a stream of income for a designated period of time, after which time charity receives the Charitable Remainder Trust balance (the “remainder”).
Charitable Remainder Trusts are often motivated by a donor’s desire to sell appreciated assets without incurring capital gain tax. Because Charitable Remainder Trusts are tax-exempt, a taxpayer can create a Charitable Remainder Trust, contribute highly-appreciated assets to it, and have the Charitable Remainder Trust sell the assets so that capital gain taxes can be avoided. Thereafter, the donor or other non-charitable beneficiary can receive a designated stream of income for life.
Sophisticated Planning Requires Sophisticated Advice
The planning strategies discussed here are not to be construed as legal advice, and are not intended and should not replace the advice of your tax professional. Tax laws change constantly, and the costs and benefits of the strategies discussed here will depend on a number of different variables, including your particular income tax reporting requirements, your level of income, prevailing interest rates at the time you implement a charitable giving plan, among others. Of course, not every strategy is appropriate for everybody. But, if you and your advisor would like to discuss the feasibility of any of these strategies with the Bonnie J. Addario A Breath Away From the Cure Foundation, we stand ready and able to do so. Please contact Daniel Trump at 415.5633.7200.
