Table of Contents:
For information about Conrad Teitell’s publications and lectures visit: taxwisegiving.com. For information about Cummings & Lockwood visit: cl-law.com.
Advantages of IRA/Charitable Distributions:
• A gigantic additional pool of funds is available for charitable gifts.
• The approximately two-thirds of taxpayers who take the standard deduction— and thus can’t deduct their charitable gifts—can get the equivalent of a deduction by making gifts directly from their IRAs to qualified charities. Not being taxed on income is the equivalent of a deduction.
• Itemizers who bump into the adjusted gross income (AGI) ceilings on charitable-gift deductibility can use distributions from IRAs to make additional gifts. Because they won’t be taxed on the distributions, they have the equivalent of additional charitable deductions.
• The carryover can be saved. Deductible gifts made in a current year are taken into account before deducting a carryover from earlier years. Making a gift from an IRA (as opposed to making a gift with other funds or assets) means that a carryover can be used in the current year.
• The IRA/charitable distribution (by not increasing AGI, as would be the case if the taxpayer withdraws IRA funds instead of using the charitable distribution) can avoid or minimize the reduction of otherwise allowable benefits that are keyed to adjusted gross income—the 10 percent AGI floor on casualty loss deductions, the increased 10 percent floor on medical and dental expense deductions, the 2 percent AGI floor on miscellaneous itemized deductions.
• As AGI increases, the following benefits can be reduced or eliminated: social security; savings bond interest exclusion for bonds used to pay for higher education tuition and fees; the adoption and child care credits; contributions to Roth IRAs; and passive activity losses and credits.
• If a donor’s state's income tax law doesn’t allow charitable deductions, making the gift from the donor’s IRA to the charity can be the equivalent of a state income tax charitable deduction.
Caution. State laws differ, so check out all the ramifications in your state. For example, in some states, IRA distributions directly to the IRA owners aren’t subject to state income tax. A distribution from the IRA to charity, thus, won’t save state income taxes, and the donor could lose a state income tax charitable deduction that might— depending on state law—be available for a gift from the donor to the charity. Of course, consider both the federal and state tax rules. You may have heard this before: Do the arithmetic under various scenarios.
PEP and Pease. The phase out of personal exemptions (PEP) and the reduction of otherwise allowable deductions under the so-called Pease provision can make IRA/charitable distributions especially attractive to high-income donors. Taking distributions from IRAs, instead of directing those payments to charity, can place a high-income person in the income levels where PEP and Pease apply.
Senate Finance Committee Chair Max Baucus (D-MT) says that his committee won’t report out a separate “extenders” bill. Extenders should be considered as part of comprehensive tax reform. Over 200 provisions will expire, only five deal with charitable gifts.
Four Other Increased Charitable Tax Benefits - Expiring 12/31/13
1. S Corporations making contributions—favorable basis adjustment. When an S Corporation contributes money or property to a charity, each shareholder takes into account the shareholder’s pro rata share of the contribution in determining her own income tax liability. But, the S Corporation shareholder had to reduce the basis in her S Corporation stock by the amount of the contribution that flowed through to her.
For 2006 through 2013. The amount of a shareholder’s basis reduction in her S Corporation stock—because of the S Corporation’s charitable gift—equals the shareholder’s pro rata share of the basis of the contributed property. [See Rev. Rul. 96-11 (1996-1 C.B. 140) for a rule reaching a similar result for charitable contributions made by partnerships.]
Example. An S Corporation with one individual shareholder makes a charitable gift of stock with a $200 basis and a $500 fair market value. The shareholder is treated as having made a $500 charitable contribution (or a lesser amount, if the “ordinary income” rules of IRC Section 170(e) apply) and reduces the basis of her S Corporation stock by $200. Under prior law, the shareholder’s basis in her stock would have been reduced by $500 (the amount of the charitable gift).
Let’s get even more technical—contributions of appreciated property by S corporations. Under IRC Section 1366(d), the amount of losses and deductions which an S corporation shareholder may take into account in any taxable year is limited to his adjusted basis in the stock and indebtedness of the corporation. The Technical Corrections Act ‘07 provides that this basis limitation doesn’t apply to a contribution of appreciated property to the extent the shareholder's pro rata share of the contribution exceeds the shareholder's pro rata share of the adjusted basis of the property. Thus, the basis limitation of Section 1366(d) doesn’t apply to the amount of deductible appreciation in the contributed property. The provision, as amended, doesn’t apply to contributions made in taxable years beginning after December 31, 2013.
Example: In taxable year 2013, an S corporation with one shareholder makes a charitable contribution of a capital asset held more than one year with an adjusted basis of $200 and a fair market value of $500. The shareholder's adjusted basis of the stock (as determined under Section 1366(d)(1)(A)) is $300. For purposes of applying the limitation under Section 1366(d) to the contribution, the limitation doesn’t apply to the $300 of appreciation, and since the $300 adjusted basis of the stock exceeds the $200 adjusted basis of the contributed property, the limitation doesn’t apply at all to the contribution. Thus, the shareholder is treated as making a $500 charitable contribution. The shareholder reduces the basis of the S corporation stock by $200 to $100 (pursuant to Section 1367(a)(2)).
2. The deduction for contributions of inventory generally is limited to the donor’s basis (typically, cost) in the inventory or fair market value, whichever is lower.
Exception. Qualifying C corporations can claim an enhanced deduction for the lesser of: (1) basis plus one-half of the item’s appreciation (for example, basis plus one-half of fair market value in excess of basis); or (2) two times basis.
A C corporation’s charitable contribution deductions for a year can’t exceed 10 percent of the corporation’s taxable income (with a five-year carryover).
To be eligible for the enhanced deduction. The contributed property must be inventory contributed to an IRC Section 501(c)(3) charity (with the exception of private non-operating foundations), and the donee must: (1) use the property in a manner consistent with the donee’s exempt purpose solely for the care of the ill, the needy or minors, (2) not transfer the property in exchange for money, other property or services, and (3) provide the taxpayer with a written statement that the donee’s use of the property will be consistent with those requirements. For contributed property subject to the Federal Food, Drug and Cosmetic Act, the property must satisfy the applicable requirements of the Act on the date of transfer and for 180 days before the transfer.
Any taxpayer, whether or not a C corporation, engaged in a trade or business is eligible to claim the enhanced deduction for donations of food inventory in 2012 and 2013.
For taxpayers other than C corporations, the total deduction for donations of food inventory in a taxable year, generally, may not exceed 10 percent of the taxpayer’s net income for the taxable year from all sole proprietorships, S corporations and partnerships (or any other entity that isn’t a C corporation) from which contributions of apparently wholesome food are made.
3. Temporary suspension in 2012 and 2013 of corporation’s 10 percent limit for qualified farmers and ranchers. In the case of a qualified farmer or rancher, the percentage limitation is eliminated for any charitable contribution of food and the contribution is treated as if it were a qualified conservation easement (see below for Conservation Gifts).
4. Qualified conservation contributions—background. Qualified conservation contributions aren’t subject to the rules that generally bar deductions for gifts of partial interests in property.
Qualified conservation contribution. A gift of a qualified real property interest to a qualified organization exclusively for conservation purposes.
Qualified real property interest is: (1) the entire interest of the donor, other than a qualified mineral interest; (2) a remainder interest; or (3) a restriction, granted in perpetuity, on the use that may be made of the real property.
Qualified organizations. Public charities, governmental units and certain supporting organizations (an organization organized and operated exclusively for the benefit of, to perform the functions of or carry out the purposes of a charity).
Conservation purposes include: (1) the preservation of land areas for outdoor recreation by or for the education of the general public; (2) the protection of a relatively natural habitat of fish, wildlife, plants or similar ecosystems; (3) the preservation of open space (including farmland and forest land), where that preservation will yield a significant public benefit and is either for the scenic enjoyment of the general public or under a clearly delineated federal, state or local governmental conservation policy; and (4) the preservation of an historically important land area or a certified historic structure.
Ceilings on deductibility. Before 2006, qualified conservation contributions of capital gain property were subject to the same percentage of AGI ceilings and carryover rules that apply to other charitable gifts of capital gain property.
Increased 50 percent of AGI ceiling—rules through 2013. The 30 percent AGI ceiling on deductibility for individuals doesn’t apply to qualified conservation contributions (as defined above).
Instead, individuals may deduct the fair market value of any qualified conservation contribution to a charity described in IRC Section 170(b)(1)(A) to the extent of the excess of 50 percent of AGI over the amount of all other allowable charitable contributions. Conservation gifts aren’t taken into account in determining the amount of other allowable charitable contributions.
Other increased benefit—15-year carryover. Individuals are allowed to carry over any qualified conservation contributions that exceed the 50 percent of AGI limit for up to 15 years. (Normally, the carryover period is five years.)
Farmers and ranchers—even more increased benefits. For an individual who's a qualified farmer or rancher for the taxable year in which the contribution is made, a deduction for a qualified conservation contribution is allowable for up to 100 percent of the excess of the taxpayer’s AGI over the amount of all other allowable charitable deductions.
Corporate farmers and ranchers. For a corporation (other than a publicly traded corporation) that is a qualified farmer or rancher for the taxable year in which the contribution is made, any qualified conservation contribution is allowable up to 100 percent of the excess of the corporation’s taxable income (as computed under Section 170(b)(2)) over the amount of all other allowable charitable contributions. A corporation’s ceiling on deductibility is normally 10 percent of its taxable income. But, for corporate farmers and ranchers, any excess may be carried forward for up to 15 years as a contribution subject to the 100 percent limitation.
Requirement that land be available for agriculture or livestock production. As an additional condition of eligibility for the 100 percent limitation, for any contribution of property in agriculture or livestock production or that is available for that production, by a qualified farmer or rancher, the qualified real property interest must include a restriction that the property remain generally available for such production.
Meeting the production test. There's no requirement for any specific use in agriculture or farming or, necessarily, that the property be used for those purposes; merely that the property remain available for those purposes.
How are you going to keep them down on the farm—or ranch? A qualified farmer or rancher is a taxpayer whose gross income from the trade or business of farming (under IRC Section 2032A(e)(5)) is greater than 50 percent of the taxpayer’s gross income for the taxable year.
Oh the farmer and the cowman should be (and frequently are) friends—comment. Why these special benefits for farmers and ranchers? When enacted, Max Baucus (D-Montana) and Charles Grassley (R-Iowa) were chairman and ranking member, respectively, of the Senate Finance Committee. In this 113th Congress, Sen. Baucus is still Chairman; the ranking member is Orrin Hatch (R-Utah). Sen. Grassley remains as a powerful Committee member.
© Conrad Teitell 2013. This is not intended as legal, tax, financial or other advice. So, check with your adviser on how the rules apply to you.