Ray D. Madoff Boston College Law School
How Current Tax Law Encourages Charitable Giving • Deduction from income taxes for charitable donations • Avoidance of capital gains taxes on donations of appreciated property • Unlimited deduction from gift and estate taxes for charitable donations • No taxation of income of charitable organizations
Gift of $10 million of closely held business Potential tax savings: 20% capital gains taxes= $2 million savings 39.6% income tax= about $4 million savings 40% estate and gift tax on remaining $4 million of after-tax funds=1.6 million savings POTENTIAL SAVINGS= 76% of Charitable Gift= $7.6 million (reducing after tax cost to donor to only $2.4 million)
The devil is in the details. 2 Important Questions: 1. Who gets the tax benefits? 2. What types of donations qualify?
Who gets tax benefits?
Income Tax Benefits of Charitable Giving Vary Greatly for $1000 Donation Taxpayer A otherwise taxed at highest marginal rate (39.6%) gets a tax benefit that is worth close to $400. Taxpayer B otherwise taxed at marginal rate of 15% only gets a tax benefit that is worth$150 Taxpayer C who doesn’t itemize-gets NO tax benefit and therefore no federal subsidy Currently 70% of Americans do not itemize and therefore get no tax benefit
• Under GOP Plan Number of Itemizers Would Fall from 45 million households down to 7 million households. • Only 5% of Americans would itemize • (Some) Charities Hoping for Universal Deduction
• 1997- ESTATE TAX EXEMPTION $600,000 • MAXIMUM TAX RATE 55% • 2007- ESTATE TAX EXEMPTION $2 MILLION • MAXIMUM TAX RATE 45% • 2017- ESTATE TAX EXEMPTION $5.5 MILLION • MAXIMUM TAX RATE 40% • GOP PROPOSAL- ESTATE TAX REPEAL
IN 2010 WHEN WE HAD NO ESTATE TAXES, CHARITABLE BEQUESTS FELL BY 37%
WHAT TYPES OF DONATIONS QUALIFY FOR CHARITABLE TAX BENEFITS?
• ****** Understanding Private Foundations v. Public Charities And what’s up with DAFs!
To be tax-exempt under section 501(c)(3) of the Internal Revenue Code, an organization must be organized and operated exclusively for exempt purposes set forth in section 501(c)(3), and none of its earnings may inure to any private shareholder or individual.
• Age of Aquarius and Sugar Sugar most popular songs • Neil Armstrong landed on the moon • Congress enacted Tax Reform Act of 1969 that significantly overhauled the world of philanthropy
• PUBLIC CHARITIES RECEIVED ALL OF THE GREAT TAX BENEFITS THAT THEY ALWAYS DID • PRIVATE FOUNDATIONS SUBJECT TO A NEW REGIME • LESS BENEFICIAL TAX RULES FOR DONATIONS—particularly for complex assets • 5% PAYOUT REQUIREMENT • EXCISE TAX ON NET INVESTMENT INCOME
• PRIVATE FOUNDATIONS ARE ONLY SUBJECT TO A 5% PAYOUT RULE, AND PAYOUT CAN BE SATISFIED BY PAYING SALARIES TO FAMILY MEMBERS AND OTHER ADMINISTRATIVE EXPENSES • ALSO—PRIVATE FOUNDATIONS CAN MEET THEIR 5% PAYOUT REQUIREMENT BY MAKING DONATIONS TO DAFS
• BY TYPE • RELIGIOUS ORGANIZATION • SCHOOL • HOSPITAL • GOVERNMENT • BY BEING PUBLICLY SUPPORTED • GENERALLY, AT LEAST ONE-THIRD OF ORGANIZATION’S SUPPORT IS FROM INDIVIDUALS WHO GIVE LESS THAN 2% OF THE ORGANIZATION’S TOTAL SUPPORT
• WHAT IS A DAF? • IT IS A PUBLIC CHARITY (CALLED A SPONSORING ORGANIZATION) THAT AGREES TO HOLD FUNDS IN A SEPARATE ACCOUNT AND AWAIT ADVICE FROM THE DONOR. • CAN BE A TRADITONAL CHARITY (e.g. CORNELL), A COMMUNITY FOUNDATION (BOSTON FOUNDATION) OR A COMMERCIAL DAF (FIDELITY CHARITABLE, VANGUARD CHARITABLE AND SCHWAB CHARITABLE)
WHAT CHARITY RECEIVED THE MOST DONATIONS LAST YEAR?
• DAFs ALLOW DONORS TO TIME DONATIONS FOR MAXIMUM BENEFIT TO DONOR • ALSO BECAUSE FUNDS ARE HELD BY A PUBLIC CHARITY, THEY PROVIDE MAXIMUM TAX BENEFITS • MOST IMPORTANT, ABILITY TO PROVIDE FULL FMV DEDUCTION FOR “COMPLEX ASSETS”
• RISE OF DAFS MAY BE REDUCING OUTRIGHT DONATIONS TO NONPROFITS • DAFS CAN BE USED TO SATISFY PRIVATE FOUNDATION PAYOUT REQUIREMENTS • DAFS HAVE NO REQUIRED PAYOUT TERM • DIFFICULT TO TRACK WHAT IS GOING ON WITH DAFS
WHAT CHARITY RECEIVED THE MOST DAF DISTRIBUTIONS FROM FIDELITY CHARITABLE, SCHWAB CHARITABLE AND VANGUARD CHARITABLE LAST YEAR?
Questions? Comments? Thank You!
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