DATE: Nov, 2004

Alternatives In Absence of CARE Act legislation

Many donors and their professional advisors have been waiting for final passage of the CARE Act with its provisions that permit direct and deferred gifts from IRAs. The CARE Act and similar Charitable Giving Act passed both the House and Senate last year but have not yet been sent to a House-Senate Conference Committee.

Attorney Reynolds Cafferata, partner with Bingham McCutcheon LLP, suggests that charitably-minded donors may nearly duplicate the results of the CARE Act by acting today and using the proper withdrawal methods. His suggestions cover both direct and deferred gifts from IRA accounts.

Direct IRA Gifts
The CARE Act would permit gifts directly from IRAs to charity. A similar result may occur with a combination of withdrawals from the IRA and then gifts to charity. First, donors over age 70 may take the minimum withdrawal and then give that amount to charity. There will be an increase in adjusted gross income (AGI) due to the withdrawal, with an offsetting charitable deduction. For many donors, Cafferata estimates that the increase in AGI will have a minor effect on itemized deductions, and the net cost compared with the CARE Act rollover would be about 1% of the total gift.

Second, a very charitable donor could take a larger IRA distribution. Since a donor may give and deduct an amount up to 50% of adjusted gross income, this larger IRA withdrawal could enable gifts up to that maximum 50% of AGI level. This amount will increase AGI even more than the minimum IRA withdrawal, but the total cost for the gift may be about 1.3% to 1.7% of the value of the gift from the IRA. For example, if Miss Donor has other income of $40,000 and a large IRA, she could take a withdrawal of $40,000 this year and give it to charity. Her total income would be $80,000, and the permitted deduction would be $40,000.

Deferred IRA Gifts
The CARE Act proposes to permit gifts from IRAs to charitable gift annuities and charitable remainder trusts. Cafferata suggests that a withdrawal plan plus selection of the charity as the designated beneficiary may be quite effective. That is, the net charitable gift could be nearly the same as the result with the CARE Act rollover.

Consider the effect of an IRA owner age 71 taking a CARE Act gift annuity or a similar IRA withdrawal plan. If the CARE Act gift annuity rollover were permitted with $100,000, then an annuity of 6.6% would be paid for life. With the CARE Act rollover to a gift annuity, all payouts would be ordinary income. A similar plan would be to take 6.6% payouts from the IRA for life. Cafferata notes that there are "certain advantages for both the donor and the charity" with this plan. The donor has "the flexibility to decrease or increase the IRA payments if his or her financial circumstances change." The donor takes a 6.6% withdrawal until age 85, when the minimum required IRA distribution amount increases to about 6.8%. After age 85, the IRA owner gives the extra withdrawal amounts over 6.6% to charity. His or her taxable income is, thus, the same under both options.

If the donor lives to age 93 and selects the charity as designated beneficiary of the IRA, the net cost of the plan is estimated at about 2% of the total gift. The donor-IRA-annuity will closely equal the proposed CARE Act IRA-to-gift-annuity Rollover.

With the CARE Act, there also would be an opportunity to roll over an IRA into a charitable remainder unitrust. For example, a 6% unitrust could be selected and payouts would be ordinary income. However, under current law an IRA owner age 71 could decide to take 6.5% payouts from the IRA and select the charity as the designated beneficiary. After age 84, the IRA required distribution would exceed the 6.5%, and the extra amount could be given to charity. With both the CARE Act unitrust and the IRA plan, growth will still be tax free, but payouts will be ordinary income.

Again, if the IRA owner lives to age 93 and has selected the charity as IRA designated beneficiary, when he or she passes away the remaining value will be given to charity. Cafferata estimates that the cost of this plan to the IRA owner when compared to the CARE Act unitrust will be less than 1%. Therefore, charitably minded IRA owners might not wait for the CARE Act, but could begin to use a similar plan today.
Taken from GiftLaw 10/25/04

TOP OF PAGE | CLOSE WINDOW

Highlights of 2004 Changes in the Income Tax Laws

To Avoid Overpaying Income Taxes, Bone Up on These Changes
Nobody likes paying more income tax than necessary. To avoid overpaying, know what you can and can't deduct, even if you use a professional tax preparer. This overview of changes to the 2004 income tax laws covers highlights. For more details, consult the IRS Web site.

Personal Exemption Amount The amount you deduct from your income for each exemption you can claim increases to $3,100 in 2004. You'll lose all or part of your exemptions if your income is over the following 2004 limits:

Standard Deduction Amount The standard deduction, used if you don't itemize deductions, increases in 2004 to:

Retirement Contribution Limits

If you're at least 50 years old before the end of 2004, you can make a "catch-up" contribution to the following retirement plans by contributing more than the usual maximum contribution:

Income Limits for Deductible IRAs The income limit for tax deductible contributions to an IRA if you're also covered by a retirement plan at work increases to $75,000 (modified adjusted gross income) for married filing jointly and $55,000 for singles or heads of household.

College Tuition Deduction The deduction limit for college tuition increases to:

Educators Deduction The Educators Deduction, which allowed educators to claim a tax deduction for money they spent on books and classroom supplies, expired in 2003 and is no longer available.

State and Local Sales Tax Deduction Ah, for the good old days when itemizers could claim a deduction for sales tax. Well, residents of the seven states with no state income tax will be able to deduct sales tax on their 2004 and 2005 federal income tax returns thanks to a new provision that gives taxpayers the choice of deducting either state income taxes or sales tax. Save receipts to show actual sales tax paid, or use IRS tables that are based on income. Add the sales tax you paid on boats or cars, which is not included in the tables.

Sports Utility Vehicle Deduction A loophole in the income tax law allowed business owners of luxury SUVs to claim a $100,000 write-off. This SUV bonanza has come to an end. Now you can only take the deduction on vehicles weighing more than 14,000 pounds. The deduction for Hummers and other large sports utility vehicles is capped at $25,000.

Health Savings Accounts (HSAs) The new tax law creates Health Savings Accounts (HSA) for taxpayers who have a high deductible health plan through their employer or are self-employed with a high deductible plan. You or your employer set up a tax-exempt account at a financial institution such as a bank or insurance company and make tax-free contributions to the account up to the amount of your annual deductible (but not more than $2,600 for yourself or $5,150 for family coverage). If you're over 55 years old, you may contribute up to $3,010 for yourself or $5,650 for family coverage. These funds are then used to pay you back for qualified medical expenses you incur.

Incentive Stock Options and Employee Stock Purchase Plans If you exercised incentive stock options (ISOs) or employee stock purchase plan options (ESPPs) in 2004 you won't have to pay Social Security and Medicare (FICA) taxes or Railroad Retirement taxes on the resulting compensation. If you have a disqualifying disposition of stock that you acquired by exercising a statutory stock option, your employer is no longer required to withhold federal income tax from your compensation if you exercised the option after the date the new tax law was enacted.

Car Donations The IRS is tired of people donating their old clunkers to charity and taking a too-generous tax deduction, so this year they've increased the reporting requirements. If you donate a car, boat, or airplane to charity and claim more than a $500 deduction on your income taxes, you must comply with new requirements. See the IRS Web site for details.

Standard Mileage Rate The standard mileage rate for business use of your vehicle increases to 37.5 cents per mile. The rate for the use of your car for medical reasons is 14 cents per mile.

TOP OF PAGE | CLOSE WINDOW