Ray D. Madoff Boston College Law School How Current Tax Law - - PowerPoint PPT Presentation

Ray D. Madoff Boston College Law School

How Current Tax Law Encourages Charitable Giving

• Deduction from income taxes for charitable donations
• Avoidance of capital gains taxes on donations of appreciated

property

• Unlimited deduction from gift and estate taxes for charitable

donations

• No taxation of income of charitable organizations

Gift of $10 million of closely held business Potential tax savings: 20% capital gains taxes= $2 million savings 39.6% income tax= about $4 million savings 40% estate and gift tax on remaining $4 million of after-tax funds=1.6 million savings POTENTIAL SAVINGS= 76% of Charitable Gift= $7.6 million (reducing after tax cost to donor to only $2.4 million)

The devil is in the details. 2 Important Questions: 1. Who gets the tax benefits? 2. What types of donations qualify?

Who gets tax benefits?

Income Tax Benefits of Charitable Giving Vary Greatly for $1000 Donation

Taxpayer A otherwise taxed at highest marginal rate (39.6%) gets a tax benefit that is worth close to $400. Taxpayer B otherwise taxed at marginal rate of 15% only gets a tax benefit that is worth$150 Taxpayer C who doesn’t itemize-gets NO tax benefit and therefore no federal subsidy Currently 70% of Americans do not itemize and therefore get no tax benefit

• Under GOP Plan Number of Itemizers Would Fall

from 45 million households down to 7 million households.

• Only 5% of Americans would itemize
• (Some) Charities Hoping for Universal Deduction

• 1997- ESTATE TAX EXEMPTION $600,000
• MAXIMUM TAX RATE 55%
• 2007- ESTATE TAX EXEMPTION $2 MILLION
• MAXIMUM TAX RATE 45%
• 2017- ESTATE TAX EXEMPTION $5.5 MILLION
• MAXIMUM TAX RATE 40%
• GOP PROPOSAL- ESTATE TAX REPEAL

IN 2010 WHEN WE HAD NO ESTATE TAXES, CHARITABLE BEQUESTS FELL BY 37%

WHAT TYPES OF DONATIONS QUALIFY FOR CHARITABLE TAX BENEFITS?

• ******

Understanding Private Foundations v. Public Charities And what’s up with DAFs!

To be tax-exempt under section 501(c)(3) of the Internal Revenue Code, an organization must be

• rganized and operated exclusively for exempt purposes set

forth in section 501(c)(3), and none of its earnings may inure to any private shareholder or individual.

• Age of Aquarius and Sugar Sugar most

popular songs

• Neil Armstrong landed on the moon
• Congress enacted Tax Reform Act of 1969

that significantly overhauled the world of philanthropy

• PUBLIC CHARITIES RECEIVED ALL OF THE GREAT TAX BENEFITS

THAT THEY ALWAYS DID

• PRIVATE FOUNDATIONS SUBJECT TO A NEW REGIME
• LESS BENEFICIAL TAX RULES FOR DONATIONS—particularly for

complex assets

• 5% PAYOUT REQUIREMENT
• EXCISE TAX ON NET INVESTMENT INCOME

• PRIVATE FOUNDATIONS ARE ONLY SUBJECT TO A 5% PAYOUT

RULE, AND PAYOUT CAN BE SATISFIED BY PAYING SALARIES TO FAMILY MEMBERS AND OTHER ADMINISTRATIVE EXPENSES

• ALSO—PRIVATE FOUNDATIONS CAN MEET THEIR 5% PAYOUT

REQUIREMENT BY MAKING DONATIONS TO DAFS

• BY TYPE
• RELIGIOUS ORGANIZATION
• SCHOOL
• HOSPITAL
• GOVERNMENT
• BY BEING PUBLICLY SUPPORTED
• GENERALLY, AT LEAST ONE-THIRD OF ORGANIZATION’S SUPPORT IS

FROM INDIVIDUALS WHO GIVE LESS THAN 2% OF THE ORGANIZATION’S TOTAL SUPPORT

• WHAT IS A DAF?
• IT IS A PUBLIC CHARITY (CALLED A SPONSORING

ORGANIZATION) THAT AGREES TO HOLD FUNDS IN A SEPARATE ACCOUNT AND AWAIT ADVICE FROM THE DONOR.

• CAN BE A TRADITONAL CHARITY (e.g. CORNELL), A

COMMUNITY FOUNDATION (BOSTON FOUNDATION) OR A COMMERCIAL DAF (FIDELITY CHARITABLE, VANGUARD CHARITABLE AND SCHWAB CHARITABLE)

WHAT CHARITY RECEIVED THE MOST DONATIONS LAST YEAR?

• DAFs ALLOW DONORS TO TIME DONATIONS FOR MAXIMUM

BENEFIT TO DONOR

• ALSO BECAUSE FUNDS ARE HELD BY A PUBLIC CHARITY, THEY

PROVIDE MAXIMUM TAX BENEFITS

• MOST IMPORTANT, ABILITY TO PROVIDE FULL FMV DEDUCTION

FOR “COMPLEX ASSETS”

• RISE OF DAFS MAY BE REDUCING OUTRIGHT DONATIONS TO

NONPROFITS

• DAFS CAN BE USED TO SATISFY PRIVATE FOUNDATION PAYOUT

REQUIREMENTS

• DAFS HAVE NO REQUIRED PAYOUT TERM
• DIFFICULT TO TRACK WHAT IS GOING ON WITH DAFS

WHAT CHARITY RECEIVED THE MOST DAF DISTRIBUTIONS FROM FIDELITY CHARITABLE, SCHWAB CHARITABLE AND VANGUARD CHARITABLE LAST YEAR?

Questions? Comments? Thank You!