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By: K. Sidney Neuman, Esq.
Rothman Gordon
Pittsburgh, Pennsylvania

How to make sure Uncle Sam participates in your charitable giving

While many people donate to charity because they genuinely want to help, Uncle Sam has also created tax savings incentives to help your charitable giving dollars to go further. We will look at three age groups, at various stages of life, who are charitably motivated and discuss some options for optimizing their gifts.

Giving for Young Professional Donors

First, take the young professionals (age 35-40) or rising corporate executives.  Let us assume income in excess of $300,000, with a home valued at $1,000,000 and a mortgage of $600,000.  With mortgage interest of $20,000, plus and state and local taxes of more than $10,000, the best gift they can make is by giving appreciated  marketable securities directly to the charitable beneficiary.  The donor receives a full charitable deduction for the mean market value (the average between the high and low values) of the securities on the day of transfer.  If the donor likes the security, as soon as the transfer is complete, he or she may repurchase the stock and have a current basis going forward.

Giving for Middle Age Donors

The second group would be ages 55-70, with incomes in excess of $500,000 and often, little or no mortgage interest and only $10,000 of state and local taxes as deductible. They are left with some $14,000 of wasted charitable deductions.  In such cases, the best alternative is to bunch their charitable deductions, again using appreciated securities, coupled with the establishment of a donor advised fund.  Say the family wants to give some $30,000 per year, and if they do nothing but make the annual gifts, they have wasted $14,000 of deductions on which the government does not share.  On the other hand, they could create a Charitable Lead Unitrust (CLUT) with an initial contribution of $100,000 of high growth stock and the Unitrust interest to be payable to a community foundation into a Donor Advised Fund.  The donors would also make the current gift of the $30,000 the first year.  A similar addition to the CLUT would be made in years two, three, four and five, with decreasing amounts being contributed out of pocket as the CLUT distributions are paid into the donor advised fund.  The CLUT would be a “grantor type” trust and the charitable deductions would be taken up front and depending on the payout, the charitable deductions could range from 50% to 90%.  A “grantor type” trust is one that for tax purposes the grantor of the trust as treated as the owner for federal Income tax purposes.  Another alternative would be to use a “grantor type” Charitable Lead Annuity Trust (CLAT), contributing say $500,000 in the first year and carrying forward  the excess charitable deduction so that it is deductible in later years.  An additional alternative is merely to bunch the contributions in one year, making the contributions in appreciated securities directly to a Donor Advised Fund maintained by the Community Foundation.  Here again, if the bunched contribution exceeds the amount deductible by the grantor for federal income tax purposes in the year of the gift, he or she carries forward the excess to the next year.

Giving for Retired Donors

Finally, we consider the case of the donors who are over age 70 1/2 and have substantial retirement income from IRAs. In this case, all qualified charitable contributions up to $100,000 per year, per donor, would be made from their individual regular IRAs.  Such contribution reduces the donors’ adjusted gross income by the amount of the qualified charitable deduction first taken from the IRA.  It is important that the charitable contributions are made prior to the donors’ taking down their required minimum distribution in order to gain the tax benefit.  Also the gift must go directly for its current use or to an endowment fund for the charity.  A donor advised fund does not qualify.