A PRIMER ON CHARITABLE DONATIONS
Americans have long
responded generously to people in need. Witness the torrent of checks to
the victims of recent hurricanes and earthquakes. But while such acts
remind us of the generosity of Americans, they also serve as reminders
about the financial side of charity, including:
The proliferation of
charitable organizations formed to complement the American Red Cross,
Salvation Army and other charities in receiving public contributions and
in distributing aid to those who find themselves in need of food,
clothing, shelter and medical care.
The urgent need to
be cautious about which organization to give money to in case you know
nothing about the one that is soliciting your contribution. If you don’t
have time to check it out, it would be better to stick with organizations
with which you are familiar.
The notion that, if
you itemize deductions on your income tax returns, you can make
tax-deductible charitable contributions that could reduce your taxable
2005 income and, thus, what you will owe on April 15. The Katrina
Emergency Tax Relief Act (KETRA) allows unlimited gifts to charity up to a
donor’s total income until the end of 2005—and for individuals the
gifts do not have to be for hurricane relief efforts.
The emergence of new
vehicles which may make it easier for large donors to make contributions
in accordance with Internal Revenue Service regulations.
It may be useful,
therefore—while hurricane, forest fire, mudslide and earthquake victims
are on your TV screen—to review a few pointers about today’s
individual philanthropy as seen through the eyes of the IRS.
While the IRS does
not address all acts of generosity—such as gifts made directly to
individuals—it does address the majority of appeals for help which you
are likely to receive or hear about from organizations to which
contributions do qualify.
You get the idea in
a definition on the cover page of the IRS’ essential 19-page Publication
526, Charitable Contributions: "A charitable contribution is
a donation or gift to, or for the use of, a qualified organization.
It is voluntary and is made without getting, or expecting to get, anything
of equal value." That publication, which can be found at the IRS’
Web site (www.irs.gov), also notes that
such organizations "include nonprofit groups that are religious,
charitable, educational, scientific or literary in purpose, or that work
to prevent cruelty to children or animals."
Descriptions of such
groups as well as examples of both organizations that are not qualified
(such as labor unions and chambers of commerce) and contributions from
which you may benefit (such as country club dues and university tuition)
are in the IRS’ booklet. Be sure to ask whether the entity to which you
are making a charitable contribution is a qualified organization or not.
Given the
consequences of hurricanes Katrina and Rita, one IRS reminder is
especially timely: "You can deduct contributions earmarked for flood
relief, hurricane relief, or other disaster relief to a qualified
organization (but not) contributions earmarked for…a particular
individual or family."
If you have given
used clothing or household goods to flood victims or other needy—or plan
to by December 31—you may claim deductions if they went to qualified
organizations.
Knowing how much you
may deduct per item is tricky. The IRS requires that deductions be at fair
market value, for which it gives a textbook definition—"the price
at which property would change hands between a willing buyer and a willing
seller, neither having to buy or sell, and both having reasonable
knowledge of all the relevant facts"—which is easier to articulate
than to implement. (Publication 526 offers a few helpful suggestions.)
To ensure
compliance, the IRS warns that donors may be liable for penalties if they
overstate the value of donated property.
Knowing how much you
may deduct in total can also be tricky unless your contributions
constitute no more than 20 percent of your adjusted gross income. If they
exceed 20 percent, you need to wrestle with an IRS worksheet to determine
your limit.
If you know that you
will be able to contribute a five-figure total, which you are not yet
prepared to allocate among qualified organizations, you may wish to
consider a donor-advised fund. Donor-advised funds offer you immediate tax
benefits and flexibility in the timing of your actual distributions to
charities. You open an account with an irrevocable contribution of, say,
$10,000 in cash, marketable securities, and/or mutual fund shares; tell
the firm how the money should be invested among several investment pools
for growth and/or income, and report your contribution on your 2005 tax
return. When ready this year or next, you tell the donor-advised fund firm
which organizations should get how much and the firm handles the grants
for you.
If your
contributions are on a very large scale and you can absorb the costs of
its organization and operations, you could establish a tax-exempt private
foundation for your charitable contributions under Section 501(c)(3) of
the Internal Revenue Code, which you would fund with deductible
contributions.
No matter your decision, it pays
to do a little research beforehand to make sure that your contribution
goes as far as it can to help those it’s intended for.
November 2005— This column is
produced by the Financial Planning Association, the membership
organization for the financial planning community, and is provided by
McGuire & Co., LLC, a local member of the FPA.
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