Time Short for Using New Tax Breaks to Increase Charitable Gifts

By Holly Hall

Fund raisers should move quickly to make sure wealthy donors understand how they can benefit from new tax breaks in effect until year's end, said speakers at the annual conference here of the National Committee on Planned Giving.

President Bush last month signed into law a measure that allows donors to write off up to 100 percent of their income for cash donations they made from August 28 until the end of the year. Members of Congress passed the measure to encourage people to give generously to hurricane-relief groups as well as to other organizations that might otherwise suffer a loss in donations because so many people want to help hurricane victims.

The tax break is significant:

Usually donors cannot write off more than 50 percent of their adjusted gross income in deductions for charitable gifts.

Still, some fund raisers at the meeting, which drew nearly 1,300 people who specialize in arranging bequests and other gifts that offer tax and financial benefits to donors, complained that the new law doesn't include a provision they have long asked Congress to authorize. The provision would allow donors age 70Z\x or older to transfer money from their individual retirement accounts to charities tax free, or to put IRA funds into a gift annuity that would provide them regular payments and leave any remaining funds to charity.

But Robert F. Sharpe Jr., a Memphis planned-giving consultant, said the new law does a better job of encouraging retirement-fund gifts, at least for the short term. Donors can withdraw IRA money with no penalty starting at 59Z\x, he noted, and the 100-percent deduction ceiling makes it more financially attractive for donors to take a large amount out of their retirement account and give it to charity. What's more, the new law isn't limited to IRA's: Donors can make gifts from 401(k) and other retirement plans.

The new law also makes giving more attractive to donors who want to use stock to pay off their charitable commitments, Mr. Sharpe said. "This is like the Capital Campaign Pledge Payoff Act of 2005," he said. Normally, donors save on their taxes by transferring stock that has grown rapidly in value directly to a charity, thereby avoiding capital-gains tax.

But with the 100-percent deduction ceiling in place, many donors would be better off selling their stock and making a cash gift to charity with the proceeds, because the savings from the charitable deduction would be worth more than they pay in capital-gains taxes, said Mr. Sharpe.

Charities should start identifying donors who could benefit from the new provisions and make them aware of the chance to make substantial new gifts, as well as the potential advantages of paying off their multiple-year pledges before January 1, speakers at the meeting here said.

However, Christopher R. Hoyt, a planned-giving expert who teaches at the University of Missouri, in Kansas City, said charities should be careful about telling donors that they can win generous tax breaks under the new law. Some states, he noted, do not allow people to take deductions for charitable gifts, so donors could end up owing large sums on their state tax returns if they had to report additional income from selling stock or making IRA withdrawals.

A big question among experts here is whether the 100-percent limit applies to donors who cash in stock or other assets to set up gift annuities before January 1. Under the new law, which aims to spur immediate gifts to charity, contributions to donor-advised funds, private foundations, and most charitable trusts are not eligible for the more-generous deduction. But because the money used to create a gift annuity goes directly to the charity, and the donor does not take a tax deduction for the income he or she receives from the annuity, Mr. Sharpe said, charitable annuities created by December 31 may be eligible for the more-generous tax deductions.