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Flood: Year-end charitable donations

Published: Sunday, Dec. 15, 2013 5:30 a.m. CDT

Contributions to qualified charitable organizations are deductible on your individual income-tax return if you itemize.

There are several effective methods that allow you to receive tax benefits from your contributions while maintaining your cash position:

Stock payments

You can donate stock that you have held for more than one year that is appreciated in value. You receive a deduction for the stock’s value, while not having to pay tax on the gain. You can donate stock you bought outright, dividend reinvestment shares, stock spin-off shares, stock in demutualized life insurance companies or stock you inherited or given to you as a gift.

Charitable gift annuity

A charitable gift annuity involves a contract between a donor and a charity. The donor transfers cash or property to the charity in exchange for the charity’s promise to make fixed annuity payments to one or two life annuitants. When the donor dies, the charity keeps the gift.

The amount of the fixed payments to the donor is determined by many factors, including the donor’s age and the policy of the charity. In order to provide a gift component, the rates for charitable gift annuities offered by charitable organizations are lower than annuity rates available from commercial insurance carriers.

The donor of a charitable annuity needs to be aware of the tax aspects regarding the computation of the deductible charitable contribution, taxation of the annuity payments, and the recognition of gain on the transfer of appreciated property.

Life insurance

You can buy a life insurance policy naming a qualified charitable organization as owner and beneficiary. Life insurance is particularly attractive in charitable giving because a relatively small amount spent on premiums can provide a significant future charitable gift.

If the premiums are paid, the amount of the death benefit to be received by the charity is certain, unlike other property, which may be subject to fluctuations in value. The annual premiums you pay will be tax deductible by you as a charitable contribution, and the charity will receive the proceeds of the policy upon your death. This is a way to help a charitable organization and establish a legacy for yourself or your family. 

Charitable remainder, lead trusts

Charitable trusts allow you to donate to a charity allowing for estate and gift tax breaks for you and your heirs. You must give up control of the property. You may not change your mind at a later date. You irrevocably give up control.

A charitable remainder trust is funded with highly appreciated property. It is structured so that there is a current beneficiary and a remainder beneficiary. The current beneficiary is the donor or another named individual, while the remainder beneficiary is a qualified charity. The trust can provide that the current beneficiary receive either a fixed amount each year or a percentage of the value of the trust each year for a period of years.

A charitable remainder trust allows for an immediate income and gift tax deduction for a charitable contribution for the present value of the ending balance of the trust’s assets designated for the charity. Another benefit is that the investment income earned by the trust is exempt from tax.

A charitable lead trust is the opposite of a charitable remainder trust. It is designed to provide income payments to at least one qualified charity for a fixed term of years, the lives of one or more individuals, or a combination of the two. After the fixed number of years is up, the trust assets are paid to either the grantor or to one or more noncharitable beneficiaries named in the trust instrument.

A charitable lead trust is not a tax-exempt entity. 

Make donations from your IRA account

If you are over the age 70.5 and/or taking required minimum distributions, you can direct a contribution to a charity from your IRA account. The contribution would not be deductible but the withdrawal would not be taxable. This is a way to make a contribution without using the cash you have in your individual name and can use the amount contributed as part of your required minimum distribution.

This method particularly benefits people that do not itemize and would otherwise not get a benefit from their charitable payment. It also benefits those in higher federal tax brackets that will not get a full benefit for their contributions, or those who do not benefit from their deduction on their state income tax returns.

The maximum allowed donation is $100,000. Unless renewed, this is tax benefit is set to expire Dec. 31.

Corporation contributions of inventory for the care of the needy, ill, or infants

Generally, when inventory is contributed to charity, the deduction is the cost or basis the corporation has in the inventory. If the donated inventory cost $10,000, the deduction will be limited to $10,000 even if the value of the inventory has a higher market value.

There are special rules for “C” corporations. If the donation is to an organization that will use it to aid the ill, needy or infants, the deduction is increased by half of the amount between the basis and market value. The maximum amount of the deduction is twice the basis. “C” corporations also may donate books to public schools and food following similar rules.

• Michael J. Flood, CPA, MST, is a partner with Caufield & Flood Certified Public Accountants in Crystal Lake. Reach him at 815-455-9538, michaelf@cfcpas.com, or CFCPAS.com.

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