Unlimited Charitable Gifts Through the End of 2005

The Hurricane Katrina Emergency Tax Relief Act (KETRA) allows unlimited gifts to charity up to a donor's total income until the end of 2005. This provision also permits unlimited IRA withdrawals and gifts to charity. Under Sec. 301(b)(1)(A), a "qualified contribution shall be allowed only to the extent that the aggregate of such contributions does not exceed the excess of the taxpayer's contribution base (as defined in subparagraph (F) of section 170(b)(1) of such Code) over the amount of all other charitable contributions allowed under such section 170(b)(1)”. Therefore, a donor may usually make gifts up to 100% of adjusted gross income (AGI). You should consult with your tax advisors to determine the actual effect.

Here are some questions and answers regarding the new act:

When is this 100% gift deduction rule applicable?
Qualifying cash gifts must be made between August 28, 2005 and December 31, 2005.

Which charities qualify for the 100% deduction?
Public charities generally will qualify.

Must the 2005 End of Year Gift be for Katrina relief?
No, if the gift is by an individual, but yes if it is by a corporation. A corporation may give up to 100% of taxable income for Katrina relief. An individual may make a 2005 end of year gift to public charities for any purpose.

Which charities or gifts will not qualify?
With the new 100% gifts rule, there are several exceptions - no private foundation gifts, no supporting organization gifts, no donor advised fund gifts and no gifts of property such as stock or land.

How does this affect IRA gifts?
When a person over age 59½ withdraws funds from his or her IRA, the withdrawal will be included in the IRA owner's taxable income. Under the new 100% of income charitable gifts option, the withdrawn funds may be given in full to charity. The full gift will then be deductible. In addition, since the 100% deduction applies regardless of the gift source, withdrawals and gifts may also be made from 401(k) plans, 403(b) plans or other qualified retirement plans.

Is the 2005 End of Year Gift different from the IRA Tax-free Rollover?
Yes. During the negotiations between the House and Senate, the decision was made to delete the IRA Tax-free Rollover from the Katrina Relief bill. The IRA Tax-free Rollover did not pass. However, as an alternative, the IRA 2005 Gifts provision for cash gifts was then added to the Katrina Relief bill.

Is there a dollar limit?
Good news - the IRA withdrawal and gift option is unlimited. A person can withdraw and give $1,000 or $1,000,000. The gift is limited only by the donor's adjusted gross income.

How should a donor make an IRA Withdrawal-gift?
The IRA owner should withdraw the desired amount this year and make the gift by December 31, 2005. Warning - some IRA custodians take two to three weeks to process withdrawal requests! IRA owners should make the withdrawal request by early December to allow time for processing by the IRA custodian. Donors must have the cash available and complete the cash charitable gift by December 31 to qualify.

With a large IRA withdrawal and then gift, will the donor receive a full deduction?
Yes, the withdrawal increases taxable income, and the gift reduces taxable income.

Are other income tax limits affected?
Usually, for higher income taxpayers, 3% of itemized deductions are not allowed. For cash gifts to charity between August 28 and December 31 of 2005, the 3% reduction does not apply to the charitable gift. 100% of the charitable gift is deductible. It appears that the IRS will treat these cash charitable deductions as itemized deductions not subject to the 3% rule.

Will state income taxes be a factor?
Some states do not have income tax, some conform to the federal 50% AGI deduction limit with a five year carry-forward, and some states have less favorable rules for charitable deductions. Most donors will be able to take a state charitable deduction for 50% or more of the IRA gift, and then take the balance on the deduction over the next five years. However, donors should check with their tax advisors to determine the actual effect.