A Primer on Charitable Giving, Part 1 – The Basics

March 25, 2010

By Raymond G. Russolillo, CPA/PFS, CFP®, Partner, Family Wealth Services

To assist friends of the firm with their income and estate planning, Eisner & Lubin will be publishing a series of articles over the next several months entitled A Primer on Charitable Giving. The current article discusses, in broad brush terms, the rules for direct charitable giving.  Future article will discuss planned giving opportunities.  This information is general in nature and should not be used to make specific planning decisions.  We urge you to discuss your specific issues with your Eisner & Lubin engagement partner.

Charitable giving seems to be in the DNA of Americans, particularly those in the upper echelons of the income spectrum.  According to the 2008 Bank of America Study of High Net Worth Philanthropy

“….high net worth households gave, on average, 9 percent of their income to charity in 2007, which is higher than the 7.4% of income high net worth households donated, on average, to charity in 2005.”

The study also notes that:

“In general, as wealth increases, so does the average amount donated to charity.  Wealthy households with a net worth between $1 and $3 million gave, on average, $13,939 to charity in 2007.  Very wealthy households, those with a net worth of $50 million or more, donated $885,387 on average, twice as much with a net worth between $20 and $50 million.”

Yes, we give a lot.  And, of course, such charitable giving is all over the lot.  Options for the high net worth individual (HNWI) range from making informal, ad hoc cash gifts to public charities to the testamentary formation and funding of private foundations and charitable trusts.  Some HNWI’s eagerly anticipate the thrill of having a building named in their honor on the campus of their alma mater while others give because they are pressured to do so by family or friends.  But the fact is, we find that it is the rare HNWI for whom charitable giving is not part of his/her overall income and transfer tax planning strategy.

Because philanthropy is such a part of the fabric of American society, the Internal Revenue Code is structured to encourage such giving.  Charitable giving during one’s lifetime is income tax deductible, subject to various income limitations, with an overall limitation of 50% of adjusted gross income (AGI).  Gifts of capital gain property are limited to 30% of AGI.  Other limits apply to private foundations.  Contributions in excess of the income limitations can be carried forward for up to five years.  Testamentary giving reduces the taxable estate dollar for dollar.

Planning Tip: Most people do not give away enough to worry about these income limits and carryover rules.  However, if you do get close to the limits, it is important to consider how they impact your planning, and to speak with us about them.  Unfortunately, we have seen clients lose the value of their “excess” contributions because they were not careful with the timing of the gifts, a problem that, before the fact, is easily solved.

Given the government’s effective subsidy of charitable giving coupled with the potential for abuse that exists in this arena, a number of parameters and limitations must be considered when crafting a charitable strategy.  The following are the takeaways you should consider in your planning:

  • Charities include religious, educational, and medical institutions, certain foundations, and governmental units.  Just as important, they do not include political parties or foreign-based charities.
  • Charitable contributions may be made in cash or tangible or intangible property.
  • Mere pledges are not charitable contributions.  But contributions charged to a credit card are considered paid in the year charged.
  • Charitable contributions are valued at fair market value for both cash and contributions of property that would have generated a long term capital gain had a sale occurred.
  • Recordkeeping Rules:  In the case of all noncash contributions, it should be noted that you, as the donor, must keep written, reliable records for each item of donated property including the following:
    • Name and address of charity;
    • Date and location of contribution;
    • Description of the property;
    • Fair market value;
    • Cost Basis;
    • Amount claimed as a deduction
    • Terms of any conditions attached to the gift.

In addition, Table 1 details the rules for gifts at various dollar levels.

 

Table 1 – Recordkeeping Requirements
Value of Contribution Cash Contribution Noncash Contribution
Less than $250 Canceled check or other bank record OR a written acknowledgement from the charity. Receipt for the charity or, if not practical, the information detailed above.
At least $250 but not more than $500 Contemporaneous written acknowledgement from the charity for each contribution of $250 or more (no limit) Contemporaneous written acknowledgement from the charity for each contribution of $250 or more
Over $500 but not more than $5,000 N/A In addition to the detail required above, you must provide how you got the property, the date of acquisition, and the cost basis
Over $5,000 N/A A qualified appraisal (except for publicly traded securities)

 

  • In order to qualify for a deduction, items of clothing or household items must be in good used condition or better.  Exception for single items valued at more than $500 and for which you obtain a qualified appraisal.
  • Donations of qualified vehicles (cars, boats, planes) valued at more than $500 are limited to the smaller of the gross proceeds from the sale of the vehicle by the organization or the vehicle’s fair market value (FMV) on the date of contribution.  Exceptions:  vehicle is used by the organization or given or sold to a needy individual.  In such cases, the FMV is claimed.