John Ermer recently wrote an article for the AFSPA (American Foreign Service Protective Association):
Executive Director Nancy Savage recently had a chance to speak with a certified public accountant, John F. Ermer, about income tax considerations related to making donations to our Foundation. Mr. Ermer is a partner in the New Haven, Connecticut office of the accounting firm of Beers, Hamerman, Cohen & Burger, PC. He has an MBA from Texas A&M University and a masters in taxation from the University of Hartford. Here’s their conversation.
Members often ask us for information on how to donate to our Foundation from their estate after they pass away. What is the current estate tax landscape?
Donations to your Foundation are tax deductible. If the estate is taxable, then the estate will receive a tax benefit from donating to your Foundation. However, due to recent tax law changes, most estates are not subject to Federal estate tax. In that case, the donation will not create a tax benefit.
That’s interesting. How would a member preserve the tax benefit of donating to our Foundation?
It’s often better to obtain an income tax deduction from a donation while the donor is alive because most people are subject to income taxes. The simplest way to make a donation is to write a check to Foundation. If you itemize your deductions, the contribution will result in a tax benefit. Make sure you retain receipts for all donations of $250 or more – just having a copy of the check is not enough support if you are audited.
Is there a way a member can contribute to the Foundation directly from his or her retirement account?
Not at the moment. However, I’m hopeful that a very useful tax provision which expired at the end of last year will be renewed by Congress. In 2014, an individual over 70.5 years old could make a contribution from his or her traditional IRA directly to a qualified charity such as the Foundation up to a maximum of $100,000. The direct payment to the charity counted towards the individual’s minimum required distribution from the IRA. This provision had the effect of reducing the individual’s income taxes, and it could also result in a lower tax rate. If Congress passes a “tax extenders” bill soon, this provision may be extended to the remainder of 2015 and perhaps future years.
Are gifts of stock a tax efficient way to contribute to the Foundation?
Yes, gifts of appreciated securities can be a very tax efficient way of making a donation. If the investment has been held for more than a year, the taxpayer generally gets to deduct the entire fair market value of the securities, and he or she also avoids recognizing the capital gain on disposal of the stock. For tax purposes, it is not beneficial to donate securities that are carrying a loss. In that case, it is better to sell the securities, take the loss and then donate the cash to the Foundation. No appraisal is necessary if you are donating publicly traded securities.
Let’s say I own appreciated securities that I have held for more than a year. Is there any limit on how much of that property that I can donate to the Foundation and deduct in one year?
Yes, you cannot take a deduction for the appreciated property that exceeds 30% of your adjusted gross income for the year. However, you can carry forward an excess donation for up to five years until you are able to deduct it in full. There are other limits to charitable contributions that you should discuss with your tax advisor.
What are some other ways of making gifts to the Foundation?
A number of financial institutions offer “Pooled Income Funds” that allow an individual to take a current tax deduction for the present value of a future gift to the Foundation or to another charitable organization. Let’s say a donor makes an irrevocable contribution of $20,000 in appreciated investments to the pooled income fund. The appreciated securities are liquidated in exchange for a proportionate share of the pooled income fund, and the donor has no capital gain. Then the donor designates a beneficiary, who could be the donor, to receive a taxable lifetime stream of income from his or her share of the pooled income fund. At the death of the beneficiary, the remaining share of the pooled income fund goes to the charitable organization designated by the donor. The present value of the remainder interest that goes to the Foundation or other charitable organization is what the donor gets to deduct as a charitable contribution in the year that he or she makes the original investment in the pooled income fund.