TAX BREAK

Current Estate Tax and Charitable Planning Developments by Nick R. Taylor

 

Several tax developments (or non-developments as the case may be) may be very timely for many taxpayers and may motivate many to take particular planning steps.  These areas include federal charitable legislation, Nebraska charitable legislation, and current developments in the federal estate tax. 

 

Federal Charitable Legislation

 

On September 21, 2005, Congress passed the Katrina Emergency Tax Relief Act.  Very significantly, through the balance of 2005, this act allows unlimited deductions for gifts to charity up to a donor’s total income.  This supercedes the normally applicable percentage limitations on gifts to public charities (cash being normally deductible up to 50% of adjusted gross income). 

 

Potential Traps In This Positive Legislation?

 

     1.  The unlimited deduction only applies to cash gifts and only cash gifts between August 28, 2005 and December 31, 2005.

     2.  The deduction does not apply to gifts to private foundations, supporting organizations, or donor advised funds.

     3.  If the gift is by a corporation, such gift must be for Katrina Relief (though if the gift is by an individual it can be for any charitable purpose).

 

Retirement Plan Implications

 

While this bill does not include provisions to allow direct IRA rollovers to charity, it accomplishes something very similar by allowing taxpayer to withdraw from an IRA (with the resulting income tax reporting) but have a 100% deduction for contributing the IRA withdrawal to a charity by year-end.  This deduction really will be a 100% deduction of the cash gift to charity even for high income taxpayers because the 3% reduction for itemized gifts for tax payers with adjusted gross income over $145,950 will not apply to these charitable gifts.  However, again there are potential landmines in making use of the above benefits, including the following:

 

     1.  The IRA withdrawal and the actual cash gift of the charity must both be accomplished by December 31.

     2.  Even though the charitable donation will not be subject to the 3% reduction, the increase in adjusted gross income (due to the IRA withdrawal) will subject other itemized deductions to the 3% loss in deduction (or an approximate 1% actual tax cost).

 

A final interesting planning scenario which arises from this year-end opportunity would be those taxpayers who could qualify for “net unrealized appreciation” (NUA) by taking a stock withdrawal from their retirement account of employer stock.  Special rules allow individuals to qualify for capital gains rates on that particular retirement plan distribution.  Presumably, that stock could be then sold at the capital gains rates with the cash proceeds then being given to a charity with the deduction being against ordinary income tax.

        

Nebraska Charitable Legislation

 

The Nebraska legislature earlier this year passed a new state income tax credit which can be utilized for a taxpayer for gifts made in 2006 through 2009.  This credit is available for charitable giving techniques which involve

 

 

Continued

 

 

To all current Tax Break Listings

Please read our Disclaimer first.

The Web Site of Fitzgerald, Schorr, Barmettler & Brennan, P.C., L.L.O., the Omaha law firm with over a century of experience and solutions