Katrina Tax Relief Act -- Charitable Contribution

The following strategies are based on Section 301 of the Katrina Relief Tax Act which provides for a temporary elimination of the contribution deduction limitations applicable to individuals (30% of gross income for gifts of appreciated assets, and 50% of gross income for gifts of cash or assets with respect to which the claimed value is limited to the donor’s tax basis).  Each strategy is discussed in general terms, some technical details may be omitted in order to focus on the essential concept, and there may be detailed rules or exceptions applicable that are not included.  Each strategy is based on the need for an actual transfer in cash to the applicable charity, no later than December 31, 2005.
  1. The IRA Transfer to Charity.  Because there is a recognition of income upon the gift of an IRA’s assets, and previously a deduction limited to 50% of gross income, such a transfer during life has seldom occurred.  Because of the new act it is now possible to gift all or a portion of an IRA’s assets, and receive a full deduction for the entire amount, totally offsetting the triggered income.
  2. The Gift That Keeps On Giving.  A variation on the gift of an IRA is the use of other assets to make the actual gift, while converting the regular IRA to a Roth IRA (which is allowed for taxpayers with no more than $100,000 in gross income).  This strategy allows a continuing tax benefit due to the tax free nature of the Roth IRA (tax free accumulations, no tax upon distribution, and no minimum distribution requirements).  This strategy may be particularly appropriate for persons with substantial wealth in addition to their IRA (or qualified plan), but who realize primarily tax exempt income.  (The distribution from the IRA to the Roth is not counted in the $100,000 test.)
  3. The Delayed Roth Rollover. Because there may be difficulty in raising cash sufficient to make the offsetting gift described in number 2, the actual distribution of cash from the IRA can be used to make the qualified charitable gift by December 31, and the Roth IRA funded up to 60 days later with cash raised from new income or the sale of other assets.
  4. Phantom Offset.  Many investors in tax shelters have seen their investment generate (welcomed) deductions in excess of their actual investment, but are now faced with the unpleasant possibility of “phantom” income if the investment is foreclosed on, refinanced or sold for nominal cash.  The use of a charitable deduction provides a means of fully nullifying the triggered income.
  5. Capital Gain-Ordinary Income Shuffle.  Although generally the new and improved charitable deduction would allow assets to be transferred to a charity to offset ordinary income, as in 2 and 4, if a capital asset were sold rather than donated in kind, the additional income would allow an equal amount of charitable contribution, but the outcome would be more favorable since the income would be subject to the reduced rate applicable to the capital gain, whereas the deduction would be an ordinary deduction, thus creating a net reduction in tax.
  6. Disappearing Alt-Min.  In a case in which there is substantial gross income, and existing substantial deductions, but the deductions are disregarded for alternative minimum tax purposes, the increased charitable contribution deduction (without any further increase in gross income) may be used as a means to reduce alternative minimum taxable income.
  7. Get Me to the Church on Time.  Because the new deduction is available only for gifts made by December 31, 2005, consideration should be given to accelerating charitable pledges which were otherwise intended to be paid over several years.  This delayed giving is often a part of major capital campaign pledges, but the acceleration could also occur by simply contributing by December 31 the amount expected to be contributed during the next year or so in the normal course of charitable giving.
  8. Counter Intuitive Income Recognition.  Because the opportunity to offset income on a large scale is possible only for a limited period, those with the ability to make the contribution but who are expecting substantial income in the future should consider accelerating the income.  An example would be the case of an installment gain reporting situation where the acceleration of the gain into the current year could be completely offset, with the added advantage of the Capital-Ordinary Shuffle described above.  Other examples of accelerated income may involve one-time accounting method shifts or the disposition of an appreciated asset to another family member or related entity.
  9. The Insider Recipient.  In general the recipient of the charitable contribution must be a “qualified charity”, which excludes charitable remainder trusts, directed funds and non-operating private foundations.  However, a charitable gift annuity contract offers an opportunity to continue benefiting from the donation for the live or lives of the annuitants and a qualifying charitable deduction at the same time for the gift portion of the agreement.  It also appears likely that private operating foundations and certain other private foundations may also be recipients, which would allow the donor to continue to direct the final disposition of the contribution.  It is also possible with some community funds to arrange a predetermined list of charities (by name or category) to receive benefits over a future period without further donor direction after the gift is made.
  10. No Free Lunch.  Although the additional income, offset by charitable deductions, would be advantageous, the additional income will be counted in the computation of the 3% phase out of other itemized deductions (the qualified contribution itself is not subject to the phase out rule).  Care should also be taken with the state income tax rules, which may or may not allow the additional deduction claimed for federal purposes.

Disclosure Required by Internal Revenue Service Circular 230: This communication is not a tax opinion. To the extent it contains tax advice, it is not intended or written by the practitioner to be used, and it cannot be used by the taxpayer, for the purpose of avoiding tax penalties that may be imposed on the taxpayer by the Internal Revenue Service.

The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2018.

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