As a result of recent natural disasters, the U.S. Congress has responded with several temporary measures designed to promote charitable giving. Due to the tsunami that struck December 26, 2004, the deadline for making contributions to the relief effort deductible in the 2004 tax year was extended to January 31, 2005. Ordinarily, charitable contributions are deductible in the year made, but those contributions made in January of 2005 may be deducted in either year. Taxpayers may wish to amend their 2004 returns to maximize the benefits of this deduction.
In the Katrina Emergency Tax Relief Act (KETRA), Congress again expanded the charitable contributions rules, this time removing the 50% Adjusted Gross Income (AGI) limitation on cash contributions made between August 28 and December 31, 2005, and the AGI-based phase-out of itemized deductions. This provision applies to all contributions made to charitable organizations during this period, not just those to hurricane relief. Therefore, during this short window of opportunity, cash contributions to your church qualify for this no-cap limit. Although this provision typically will only affect those with a large amount of disposable income, it is a provision for many more to look into if they have been planning a one-time large gift to their favorite charity. Congress was concerned that other organizations relying on donations would suffer, as they did following September 11, 2001. Excess contributions may still be carried forward five tax years.
KETRA also included expansion of the provision for donated food inventory to include all business entities, not only C corporations, and for donation of book inventories to schools. There is also a tax credit available to individuals who open their principal residences to persons displaced by Hurricane Katrina. The credit is $500 for each person who is given free lodging for at least 60 days in either 2005 or 2006. The maximum amount of the credit is $2000 total over both tax years.
Some taxpayers may find it advantageous to donate appreciated stock or a vacation home rather than selling stock and donating cash. A donor of stock is entitled to deduct the fair market value of the stock and does not have to recognize capital gains. While there is a capital gains exclusion for a principal residence if you were to sell it, this does not apply to vacation homes. A taxpayer may even donate a partial interest in a vacation home and reserve the right to its use for part of the year. This effectively provides a double tax savings by avoiding the capital gains and reducing taxable income by the value of the stock
The American Jobs Creation Act of 2004 made it more difficult to deduct the "Blue Book" value of donated automobiles, in most cases limiting the deduction to the value realized by the donee organization. Donors must obtain statements from the donee organization stating the expected use for the donated vehicle, whether for resale, organizational use or distribution to a needy individual. If the vehicle is to be resold within 30 days of the donation, the deduction is limited to the amount realized in the sale by the organization.
When making gifts other than to charitable organizations, it is important to be aware of potential gift tax consequences. For the 2005 tax year, the annual gift tax exclusion amount is $11,000 per recipient; it increases to $12,000 for 2006. A taxpayer is permitted to give to an unlimited number of recipients, and provided the value of all money and property given to each individual is $11,000 or less, no tax will be owed and no return need be filed.
There are several exceptions to the general rule on taxable gifts. Married couples can effectively double their nontaxable gifts to individuals by electing to split the gifts. However, a gift tax return must be filed by April 15 of the following year to make the election. Direct payments of medical and educational expenses are not included in taxable gifts, so rather than giving relative money for college, it may be preferable to make a tuition payment directly to the educational institution.
Even if a gift exceeds the annual exclusion amount, it may not be subject to tax. That is because in addition to the exclusion, a portion of the estate and gift tax credit may also be applied to lifetime gifts. The amount of the credit is $345,800, which means that up to $1 million in otherwise taxable gifts is not subject to tax. To apply the gift tax credit to lifetime gifts, a taxpayer must file Form 709, U.S. Gift and Generation-Skipping Tax Return, and indicate that the credit is being used.
