Tax Strategies for Individuals

Table of Contents

• Planned or Deferred Giving
• Types of Planned and Deferred Gifts
• Should You Make a Planned or Deferred Gift?
• Government and Non-Profit Agencies

When an organization claims to be tax-exempt, it does not necessarily mean that contributions are deductible. Tax-exempt means that the organization does not have to pay federal income taxes while tax-deductible means the donor can deduct contributions to the organization. The Internal Revenue Code defines more than 20 different categories of tax-exempt organizations, but only a few of these offer tax-deductibility for donations.

The well-known mainstream charities generally provide deductibility for donations. But, surprisingly, some well-known organizations do not. If deductibility is a factor in your decision to make a contribution to a tax-exempt organization, especially if the amount is substantial, you might want to determine whether the organization qualifies for deductibility. IRS Publication 78, the Cumulative List of Organizations, is an annual list of those charities eligible for deductibility. You can also call the IRS (800-829-1040) about the deductibility of a contribution if you're in doubt.

You can obtain three documents on a specific charity by sending a written request to the attention of the Disclosure Officer at your nearest IRS District Office. The IRS will charge a per-page copying fee for these items. To speed your request, have the full, official name of the charity, as well as the city and state location. These three publicly available documents are:

• Form 1023: the application filed by the charity to obtain tax-exempt status.
• IRS Letter of Determination: the two-page IRS letter that notifies the organization of its tax-exempt status.
• Form 990: the financial/income tax form filed with the IRS annually by the charity. (Charities with a gross income of less than $25,000 and churches are not required to file this form). Among other things, Form 990 includes information on the charity's income, expenses, assets, liabilities and net assets in the past fiscal year. Form 990 also identifies the salaries of the charity's five highest-paid employees. When contacting the IRS for copies, specify the fiscal year.

Tip: If your request for information involves only Forms 990, you can get a faster response by writing directly to the IRS Service Center where the charity files its return. Contact your nearest IRS office for the address of the appropriate Service Center.

Tip: The charity registration office in your state (usually a division of the state attorney general's office) may also have a copy of the charity's latest Form 990, along with other publicly available information on charities soliciting in your state.

Related Guide: For a discussion of how to make charitable donations, please see the Financial Guide: CHARITABLE CONTRIBUTIONS: How To Give Wisely.

Related Guide: For a discussion of how to make charitable donations, please see the Financial Guide: FRAUDULENT CHARITIES: How To Protect Yourself.

Even though the charity qualifies for deductibility, taxpayers are often disappointed to learn that their expected deductions are not allowed. Here are some of the common misconceptions about the deductibility of charitable contributions:

• If you go to a charity affair or buy something to benefit a charity (e.g., a magazine subscription or show tickets), you cannot deduct the full amount you pay. Only the part above the fair market value of the item you purchase is fully deductible. For example, if you pay $500 for a charity luncheon worth $200, only $300 can be deducted. An exception allows you to deduct the full amount if what you get in return is insubstantial in value (e.g., 2% of the value of your contribution) and the charity tells you the deductible amount.
• Since contributions are deductible only for the year in which they are actually paid or delivered, pledges are not deductible until they are paid.
• It's a mistake to believe you can deduct estimated cash contributions.  This was widely done, though IRS required you to make a record of some kind at or around the time of the gift. But cash contributions in 2007 and after aren't deductible - at all- unless substantiated by a receipt from the charity, a canceled check, a credit card statement or other consultinging documentation from the charity.
• No donation of $250 or more is deductible unless the taxpayer has a receipt from the charity substantiating the donation.
• Since contributions must be made to qualified organizations to be tax-deductible, donations made directly to needy individuals are not deductible.

Note: The amount of the deduction you can get for the garden-variety charitable contribution (we'll talk about more sophisticated techniques in a moment) depends on the type of charity and the type of contribution, as well as on the specific tax situation of the donor (since there are percentage-of-income limitations). For these reasons, tax planning for charitable contributions requires the assistance of your tax advisor.

Planned or Deferred Giving

There are a number of sophisticated techniques for giving money to a charity that differ substantially from the usual method of just writing a check. You've probably been approached by a number of charitable organizations suggesting ways you can save tax dollars through the use of planned or deferred giving techniques. Indeed, much of the revenue of many charities comes from the use of such techniques. However, not all charities have the resources to be able to offer the more sophisticated arrangements. Briefly stated, these various techniques, discussed below, work as follows:

A planned or deferred gift is a present commitment to make a gift in the future, either during your lifetime or pursuant to your will. Aside from assuring your favorite charities of a contribution, planned or deferred giving brings with it certain tax benefits. Charitable gifts made pursuant to your will reduce the amount of your estate that is subject to estate tax. Lifetime gifts have the same estate tax effect (by removing the assets from your estate), but also might offer a current income tax deduction. If you have property that has significantly appreciated in value but does not bring in current income, you may be able to use one of these techniques to convert it into an income-producing asset. Further, you will be able to avoid or defer the capital gains tax that would be due on its sale - all the while helping a charity.

Tip: Many variables affect the type of planned or deferred giving arrangement you choose, such as the amount of your income, the size of your estate and the type of asset transferred (e.g., cash, investments, business interests, real estate, retirement plan) and its appreciated value. Professional guidance is even more important here than in the garden-variety type of contribution program because these of the complexity of these gifts.

Types of Planned and Deferred Gifts

There are several types of planned and deferred gifts: (1) life insurance, (2) charitable remainder annuity trust, (3) charitable remainder unitrust, (4) charitable lead annuity trust, (5) charitable lead unitrust, (6) charitable gift annuity, (7) pooled income fund. These are discussed briefly below:

Life Insurance

You name a charity as a beneficiary of a life insurance policy. With some limitations, both the contribution of the policy itself and the continued payment of premiums may be income-tax deductible.

Charitable Remainder Annuity Trust

You transfer assets to a trust that pays a set amount each year to non-charitable beneficiaries (for example, to yourself or your children) for a fixed term or for the life or lives of the beneficiaries, after which time the remaining assets are distributed to one or more charitable organizations. You get an immediate income tax deduction for the value of the remainder interest that goes to the charity on the trust's termination, even though you keep a life-income interest. In effect, you or your beneficiaries get current income for a specified period and the remainder goes to the charity.

Charitable Remainder Unitrust

This is the same as the charitable remainder annuity trust, except the trust pays the actual income or a set percentage of the current value (rather than a set amount) of the trust's assets each year to the non-charitable beneficiaries. Here, too, you or your beneficiaries get current income for a specified period and the remainder goes to the charity.

Charitable Lead Annuity Trust

You transfer assets to a trust that pays a set amount each year to charitable organizations for a fixed term or for the life of a named individual. At the termination of the trust, the remaining assets will be distributed to one or more non-charitable beneficiaries (for example, you or your children).

You get a deduction for the value of the annual payments to the charity. You may still be liable for tax on the income earned by the trust. You keep the ability to pass on most of your assets to your heirs. Unlike the two trusts above, the charity gets the current income for a specified period and your heirs get the remainder.

Charitable Lead Unitrust

This is the same as the lead annuity trust, except the trust pays the actual income or a set percentage of the current value (rather than a set amount) of the trust's assets each year to the charities.

Here, too, the charity gets the current income for a specified period and your heirs get the remainder.

Charitable Gift Annuity

You and a charity have a contract in which you make a present gift to the charity and the charity pays a fixed amount each year for life to you or any other specified person. Your charitable deduction is the value of your gift minus the present value of your annuity.

Pooled Income Fund

You put funds into a pool that operates like a mutual fund but is controlled by a charity. You, or a designated beneficiary, get a share of the actual net income generated by the entire fund for life, after which your share of the assets is removed from the pooled fund and distributed to the charity. You get an immediate income tax deduction when you contribute the funds to the pool. The deduction is based on the value of the remainder interest.

Should You Make a Planned or Deferred Gift?

When determining whether to make a planned or deferred gift to a charity, ask whether you are ready to make a commitment to invest in a charitable organization. Keep in mind that despite the tax benefits, you will still be out-of pocket after the deduction.

Some questions you should consider are:

• Does the gift fit into your estate and family plan?
• Is the charity viable, reputable, creditable, and reliable?
• Do you wish to consulting its programs?

Government and Non-Profit Agencies

• Most state governments regulate charitable organizations. To obtain information on these regulations, which vary from state to state, contact the appropriate government agency (usually a division of the Attorney General or the Secretary of State).
• Contact the appropriate state government agency to verify a charity's registration and to obtain financial information on a soliciting charity.
• Contact your local Better Business Bureau to find out whether a complaint has been lodged against a charity.