Important year-end giving information
Congressional action has created a special opportunity in 2005 for year-end giving. Following Hurricane Katrina, the rules were changed on deductions for cash gifts in order to help all charities in this time of great need. Under the new rules, cash gifts to charities made between August 28 and December 31, 2005 will generally be deductible up to the entire amount of adjustable gross income (rather than the normal 50% limit). Another option permits an IRA withdrawal and 100% deduction for a cash gift to charity, with tax impact for some donors. The gifts may be for any charitable purpose, not just for Katrina relief.
Further Details
The Hurricane Katrina relief bill, unanimously passed by the House and Senate on September 21, and signed into law by the president on September 23, increased the contribution limit for outright gifts of cash made during the period August 28, 2005 through December 31, 2005. Under existing law, the maximum amount of cash contributions that are deductible in any one year is 50 percent of adjusted gross income. That limit is being increased to 100 percent of adjusted gross income in the case of certain cash gifts made during the stipulated period.
For example: An individual with adjusted gross income of $200,000 made contributions to various charities amounting to $50,000 prior to August 28. Wanting to help charities involved in Katrina relief, as well as other charities whose donations are down because dollars that normally would have flowed to them have been diverted for Katrina relief, this individual contributes $150,000 cash to certain public charities between August 28 and the end of the year. This donor will be able to deduct $200,000 for 2005, resulting in zero income tax. Prior to the increase in the deduction limit, this donor would have been able to deduct only $100,000 in 2005, though the excess could have been carried forward for up to five additional years. Click here for additional examples.
A contribution to a private foundation, a supporting organization, or a donor advised fund would not qualify for the higher limit. A contribution to a public charity, whether or not that charity is engaged in Katrina relief and whether or not the contribution is unrestricted or for a designated purpose, would qualify. Still another benefit of making qualified cash gifts before the end of the year is that they will not be subject to the reduction rule applicable to itemized deductions. In general, a taxpayer’s itemized deductions must be reduced by three percent of the amount by which adjusted gross income exceeds $145,950. However, there is no such adjustment for qualifying cash contributions made from August 28 through December 31.
An Opportunity for People with IRAs and Qualified Retirement Plans
Because of the increase in the deduction limit, people who have more money in their IRAs or other qualified plans than they will likely need for retirement security, and who are at least 59 and 1/2 years of age, may want to consider withdrawing assets and contributing them to a charity. Upon withdrawal, the assets, as before, will be added to adjusted gross income, but the full amount added to income can then be deducted from income, resulting in a “wash.”
However, before taking such action, donors should consider how increasing their adjusted gross income may reduce the amount they can deduct for medical expenses and casualty losses, accelerate the phase-out of personal exemptions, and cause some loss of other itemized deductions. The amount withdrawn from an IRA or other qualified plan and then contributed will not be affected by the three-percent reduction in itemized deductions. Other itemized deductions, as well as the personal exemption, may be diminished with a rise in adjusted gross income. Notwithstanding these possible consequences, withdrawing and contributing assets from an IRA or other qualified plan during this window of opportunity may make sense.
Donors should consult their tax advisors about both the optimum amount to contribute in 2005 and the advisability of making contributions from their IRAs or other qualified plans.
InterVarsity does not provide legal counsel, but we are pleased to team up with you and your planning advisors. Please be sure to consult your professional advisors before implementing any ideas offered in this communication. InterVarsity is a charter member of the Evangelical Council for Financial Accountability and holds one of the highest ratings available from Charity Navigator.
