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A Brand-New, Year-End, Tax-Planning Opportunity
This bimonthly column, written by members of the Estate Planners Advisory Committee of the Federation Endowments Corporation, offers advice on insurance, estate, tax and investment planning opportunities to help both you and the community.
The recently enacted Katrina Emergency Tax Relief Act allows increased charitable deductions through the end of 2005. This applies to charitable cash gifts made by individuals to any public charity (with three exceptions) for any charitable purpose between Aug. 28 and Dec. 31.
Cash gifts made by individuals during this time period will not be subject to the 50 percent Adjusted Gross Income limitation or to the 3 percent phase-out of itemized deductions that applies to individuals with Adjusted Gross Income over the $145,950 threshold amount for 2005.
The suspension of the percentage limitations does not apply to gifts to private foundations, donor-advised funds and supporting organizations. Even though this tax break was enacted in response to Hurricane Katrina, there is no requirement that the donation be used in any specific manner and need not be directed toward Hurricane Katrina relief.
For Retirement-Plan Owners
The temporary charitable-giving incentives may also be of particular interest to charitably inclined, high-net-worth owners of retirement-plan accounts.
Through the end of 2005, an individual can withdraw funds from a qualified retirement account, give all or part of such amount to charity and receive a charitable deduction of nearly 100 percent of the amount donated. This technique will not, however, result in a zero tax cost for several reasons.
For one, individuals under the age of 591/2 will still be subject to the 10 percent additional premature distribution penalty, unless the withdrawal is made from a retirement account that had been inherited.
Second, there are collateral tax issues that might impact withdrawing from an IRA before the end of the year in order to make a cash gift to a charity.
For example, some states impose an income tax on distributions from a retirement plan so the distribution may increase the donor's state tax bill. Also, while the Katrina relief waives the Adjusted Gross Income limit for the cash gift, a distribution from a retirement plan will increase the taxpayer's AGI. This increase in AGI may slightly increase an individual's taxes because he or she may lose another tax benefit that is based on his or her level of AGI.
An increase in AGI could reduce the amount of the taxpayer's other itemized deductions that can actually be deducted because of the 3 percent of AGI phase-out of itemized deductions or increase the taxpayer's exposure to the Alternative Minimum Tax.
In addition, an increase in one's AGI could increase the income tax on Social Security benefits he/she receives; reduce deductions such as medical, miscellaneous itemized deductions and casualty losses; and adversely affect eligibility for Roth IRA contributions.
Despite these minor limitations, the Katrina Emergency Tax Relief Act of 2005 presents a unique opportunity to increase the tax benefit from a cash contribution to Federation before 2005.
This includes contributions to Federation's own Hurricane Katrina Fund, an increase in one's cash contributions to Federation's annual campaign, or to the Federation Endowment Corporation, as well as to a partner agency or any other Federation-sponsored program.
But remember, your contribution must be made before the year's end!
For more information on endowment giving, call Rachel Gross, acting director of the Federation Endowments Corporation, at 215-832-0572; for the annual campaign, 215-832-0577, and to the Katrina Fund, 215-832-0577.
Lawrence Chane is a partner in the law firm of Blank Rome LLP.