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Tax Deductibility of Gifts—Limitations
For donors who itemize their deductions,
making charitable gifts can play
a significant role in reducing
taxable income. There are rules,
however, that go along with how
much one can deduct from adjusted
gross income for gifts to charities.
Cash gifts can be deducted up to 50 percent of adjusted gross income. Any excess may be carried over for five additional years until the deduction is exhausted.
Gifts of appreciated assets, such as securities and real estate, can be deducted at full fair market value up to 30 percent of adjusted gross income. If the gift is made outright to charity, then the entire capital gain on the asset is avoided. Gifts that return income may have some capital gains ramifications.
Gifts of non-cash assets, such as real property and interest in an existing life income gift, are also subject to the 30 percent limitation.
Gifts of tangible personal property, such as works of art or jewelry, are subject to the 30 percent limitation. In addition, in order to claim a full fair market value deduction, those assets must be used in relation to the charity’s mission. Otherwise the “related use” rule fails, and the donor may only deduct her cost basis in the asset.
Job and Growth Tax Relief Reconciliation Act of 2003
That's a mouthful of a title for an Act whose provisions will only be in effect for a few years. Regardless, this package is intended to get the economy back on track.
Highlights of the Act include:
Reduced Income Tax Rates
This act accelerates the rate reductions that were called for with the 2001 tax law changes. As of January 1, 2003, the top four marginable income tax brackets have dropped to 35 percent, 33 percent, 28 percent and 25 percent. These rates will be in effect through the end of 2010.
Reduced Capital Gains Tax Rates
The new individual tax rate on long-term capital gains (including the alternative minimum tax)
has been reduced from 20 percent to 15 percent. For individuals in the 10 percent and 15 percent federal income tax brackets, that
capital gains rate has been lowered to 5 percent. The change to 15 percent applies to sales made after May 5, 2003
and before January 1, 2009.
Reduced Dividend Income Taxes
Dividends to individual shareholders are no longer taxed as ordinary income; they are now taxed at the same rate as capital gains - 15 percent - for individuals in the top four brackets. Investors must have held the shares for more than 60 days. Beginning in 2009, dividends will again be taxed as ordinary income.
IRAs: Minimum Required Distribution Rules
The Internal Revenue Service issued proposed new rules effective January 1, 2001, making it easier to determine your minimum required distributions (MRDs) from a tax-deferred retirement plan.
Determining MRDs no longer requires a special calculation based on your life expectancy and that of your designated beneficiary. Instead, most people will be able to use a standard table. You must still begin to take distributions by April 1 of the year after the year in which you turn 70, but your required payments will likely be smaller than under the old rules, resulting in lower income tax payments during your retirement and the possibility of leaving more tax-deferred assets to your heirs and to charity.
The new rules make it easier to name charities as beneficiaries of your retirement account because doing so will have no impact on the calculation of your MRD or that of your non-charitable beneficiaries.
For more information, contact your financial advisor or the administrator of your tax-deferred retirement plan.
Economic Growth and Tax Relief Reconcilliation Act 2001
In June 2001, President Bush signed into law the Economic Growth and Tax Relief Reconciliation Act of 2001. Included in the law are some of the most significant tax changes since the Tax Reform Act of 1986. The Act repeals the estate tax for one year—2010. The law has a “sunset provision,” meaning that on January 1, 2011, unless Congress has enacted a new law, estate and gift tax schedules will revert to the levels of January 1, 2001. Areas affected by the new law include:
Income tax rates
Estate tax rates
Estate tax exemption levels
Gift Tax exemption levels
Generation-skipping transfer taxes
Stepped up basis rules
Income tax rates will decline for every taxpayer under this new law. The following table lists the income tax rate changes through 2010.
The maximum tax rates charged to taxable estates will gradually decrease, and the estate tax exemption amounts (the unified credit or the amount you are allowed to leave to someone at death without incurring estate tax) will gradually increase as shown in the estate tax table. The gift tax exemption amount (the sum that you can give away to a person during your lifetime) has increased to $1 million, but will revert to a unified $675,000 with estate taxes in 2011. After the repeal, the top gift tax rate will equal the top individual income tax rate.
Generation-skipping taxes are imposed on transfers to persons more than one generation down above a certain amount. As with estate taxes, the generation-skipping exemption amount mirrors the estate tax exemption amount until 2010 when this tax is repealed. In 2011, the generation-skipping exemption reverts back to $1,060,000 for each person.
Under old law, any assets passing to heirs at death received a “step up” in their basis. For example, if your mother owned IBM stock on which she paid $10 per share and at her death she leaves you the IBM worth $100, your new cost basis is $100 per share. Your basis has been “stepped up.” The new law substitutes a modified carryover basis rule, meaning you inherit the basis of the person who left the stock to you, or $10 per share in this example. There are two exceptions to this rule: an executor may add up to $1.3 million of basis to certain assets transferred; and an additional $3 million of basis may be added to certain assets transferred to a surviving spouse.
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