September 16, 2017

As we approach yearend, charitable gift planning becomes more crucial as the deadline for making a current year gift draws near. The year of the gift may be important for tax reasons or even a charity’s recognition program. An income tax charitable deduction is allowed for transfers to charity that occur during the tax year. It’s important that donors plan their charitable transfers in advance and start the process early enough to avoid any timing issues that may arise from the logistics of the transfer. This article reflects the IRS rules currently existing for 2017 tax returns.

"It’s important that donors plan their charitable transfers in advance and start the process early enough to avoid any timing issues that may arise from the logistics of the transfer."

Charitable contributions are allowed as an itemized deduction on the donor’s income tax return for the year in which the gift is made. Aside from charitable deductions, typical itemized deductions currently include home mortgage interest, property tax, state and local income tax, and some medical expenses. Those who do not itemize their deductions for 2017 will be entitled to a standard deduction in the range of $6,350 for single taxpayers to $12,700 for married taxpayers filing jointly.

The total amount of itemized deductions available to a taxpayer is reduced by 3% of any adjusted gross income (AGI) exceeding $261,500 for single taxpayers and $313,800 for married taxpayers filing jointly for 2017. AGI is a taxpayer’s gross income less “above the line” deductions such as 50% of self-employment tax, additions to retirement accounts, and alimony. The maximum itemized deduction phaseout reduction is limited to 80% of the itemized deductions.

The charitable deduction is generally limited to 50% of the taxpayer’s AGI with lower limits of 30% and 20% for certain situations.

The first 30% AGI limit applies to gifts made to other than a 50% public charity. 50% public charities receive most of their support from the general public and include educational institutions, religious organizations, hospitals, and government agencies. Examples of 30% nonpublic charities include veterans organizations (VFW), fraternal societies (lodges), nonprofit cemeteries, and private non-operating foundations. Private non-operating foundations provide grants to other charities and do not receive donations from the general public. Examples of these 30% private foundations include corporate and family foundations such as the Wells Fargo Foundation and the Rockefeller Foundation.

A second 30% AGI limit applies to gifts of long-term (held longer than one year) capital gain property made to a 50% public charity. This 30% limit does not apply if the donor uses their lower cost basis in the property as the gift value instead of the market value.

A 20% AGI limit applies to gifts of capital gain property made to a 30% nonpublic charity. The gift date market value of long-term capital gain publically-traded stock may be used as the gift value. Otherwise, the gift value is the donor’s cost basis for property donated to a 30% nonpublic charity.

Any charitable deduction exceeding these limits may be carried forward for five years.

The gift value is generally the market value of the donated property on the gift date. The donor’s cost basis is used as the gift value for gifts of short-term capital gain property (not held longer than one year) and gifts of appreciated tangible personal property put to an unrelated use by the charity. The donor’s cost basis is also used for gifts of appreciated property, excluding publically-traded securities, to 30% nonpublic charities.

Publically-traded securities are valued by averaging their highest and lowest quoted selling prices on the gift date. If there are no sales of the security on the gift date, the average selling prices immediately preceding and following the gift date are weighted in inverse order by the respective number of trading days between the selling dates and the valuation date.

Mutual fund shares are valued using the fund’s closing price (net asset value) on the gift date. 

Tangible personal property such as jewelry, gems, art, antiques, books, vehicles, airplanes, and boats are valued at the price it would sell for on the open market. These estimates often require an appraisal from a qualified appraiser of the property being donated. However, the gift value of tangible personal property is the lessor of its market value or the donor’s cost basis when the donated property is put to an unrelated use by the charity. Unrelated use includes the charity’s sale of the donated property and use of the proceeds in furtherance of its charitable mission.

The date on which a charitable gift is made, also known as the date of deliverynot only determines the tax year in which the related charitable deduction may be taken, but could determine the value of the gifted assets. The gift value of publically-traded securities with daily changes in market value, and other noncash assets, is the market value of the donated asset on the gift date. Lastly, the gift date could affect the donor’s long or short-term holding period of the gifted asset.

"The date on which a charitable gift is made, also known as the date of deliverynot only determines the tax year in which the related charitable deduction may be taken, but could determine the value of the gifted assets."

The gift’s date of delivery depends on the nature of the asset donated and the method by which the asset is transferred to the charity.

In general, the date the check is placed in the mail is the date of delivery (mailbox rule). A check that was mailed on 12/31/2017 will have a 12/31/2017 gift date regardless of when the charity receives the check or when the charity presents the check for payment.

Some courts have problems with the date stamped on the check envelope by a private postage meter. To be certain of the gift’s date of delivery, the check should be mailed using the U.S. Postal Service certified or registered mail with a return receipt requested. 

If a check is hand-delivered, the date of delivery is the date on which the check is physically delivered to the charity. If a check is post-dated to some point in time after the check has been delivered, the effective date of delivery is the later of the check’s post-date and the date the check is placed in the mail or hand-delivered.

The gift’s date of delivery is the date on which the credit card charge is made and not when the donor subsequently pays the bank. It is not entirely clear whether the date of the credit card charge is the date on which the charity receives the credit card information or the date on which the charge is posted to the donor’s account. To be safe, a donor should avoid last-minute donations by credit card.

The method of delivery is most important in this category. Gifts of securities may be electronically transferred, hand-delivered, mailed, or reissued in the charity’s name. Each delivery method has its own date of delivery rules. As previously mentioned, the date of delivery will determine the amount of the gift as the securities will be priced, for gift valuation purposes, on the date of the gift. 

The Depository Trust Company (DTC) streamlines the process required to transfer securities from one person or entity to another. Your custodian should be able to easily transfer securities through DTC to your charity. DTC is the easiest, safest, and most efficient way to accomplish security transfers. No actual paper stock certificate is moved. The transfer of ownership is accomplished through a “book entry” change in the owner’s name. 

The date of delivery is the date the security is electronically transferred, by DTC, to the charity. This transfer can be accomplished within a day or two from the time you give the transfer instructions to your broker or other financial institution.

If the actual stock certificate is hand-delivered or mailed to the charity, it must be properly endorsed by the donor or accompanied by a properly endorsed stock power. When endorsing the stock certificate, or stock power, it is important that each named owner sign exactly as their name appears on the stock certificate. The signatures must be guaranteed by a bank or other institution participating in the Medallion Signature Guarantee program. 

Most charities recommend that nothing other than the medallion guaranteed signature be included on the back of the security or the stock power. This will enable the charity to complete the assignment portion (to whom the stock is being transferred) with the name of their custodian or street name. It is important to remember that once endorsed in blank (no assignment name), the stock certificate, or stock certificate plus stock power, are negotiable instruments and care must be taken to keep such documents secure.

The gift’s date of delivery is the date the security is received by the charity. This also includes the situation where the donor hand-delivers the security to the donor’s broker or agent who then hand-delivers the security to the charity.

Since the properly endorsed blank stock certificate or blank stock power with the stock certificate are negotiable instruments, it is best to use the blank stock power when mailing. Send the unendorsed stock certificate to the charity in one envelope and then send the properly endorsed blank stock power to the charity in another envelope. Since both documents (certificate and power) are required to transfer the security, this two-envelope approach limits the opportunity for theft. 

As with gifts by check, the date of delivery is the date the security and stock power are mailed to the charity or the charity’s agent.

Physical securities held by the donor can be delivered to the donor’s broker or to the issuing corporation, or the transfer agent, with instructions that the securities be reissued in the charity’s name.

The gift’s date of delivery is the date the owner’s name is changed to the charity on the books of the issuing corporation; a process that could take weeks. Donors need to be careful when reissuing securities in the charity’s name since the donor does not control the actual gift date. The process must be initiated early enough to insure that the gift date is sometime prior to yearend.

"Donors need to be careful when reissuing securities in the charity’s name since the donor does not control the actual gift date." 

Mutual fund shares cannot be transferred electronically through DTC. If the donor holds the mutual fund shares in an account at a brokerage firm or mutual fund company where the charity also has an account, the shares can be transferred directly to the charity’s account. Otherwise, the donor will have to make other arrangements with the mutual fund company to transfer ownership of the shares to a charity.

The donor should first contact the charity to get the charity’s account information that will be needed for the donor’s subsequent transfer instructions to their brokerage firm or mutual fund company. The date of delivery is the date that the transfer takes place, which could take weeks. For this reason, donors should be sure to start the mutual fund transfer process early so that the transfer occurs by yearend.

The gift date is the date the charity receives a properly executed deed unless local law requires that the deed be recorded. When recording is required, the gift date is the date the deed is recorded.

The gift date is the date that legal title to the art is transferred from the donor to the charity and the charity takes actual physical possession of the art.

There are other forms of giving available to the charitably-inclined beyond gifts of cash, securities, real estate, and art. When a donor reaches the age of 70½ they can instruct their IRA administrator to transfer up to $100,000 to a charity each year. Although this transfer qualifies for the donor’s required minimum IRA distribution, it is not included in the donor’s gross income for tax purposes. 

Excluding the transfer from gross income has the same effect on net taxable income that would result from including the transfer in gross income and then taking an itemized deduction for the full amount (instead of only 50% of AGI). Excluding 100% of this charitable transfer from gross income effectively bypasses the charitable itemized deduction limit of 50% AGI. Of course, since the transfer is excluded from gross income, no charitable itemized deduction is available.

The $100,000 limit is an annual limit and the donor can transfer $100,000 to charity each year. This limit is also “per person.” The donor’s spouse, who has his or her own IRA, can transfer another $100,000 to charity each year without including the transfer in gross income on a joint return.

The transfer must be directly from a traditional IRA or a Roth IRA, and the IRA owner cannot take any possession of the distribution prior to it being transferred to a charity. The permissible charities exclude donor advised funds, charitable remainder trusts, and 30% nonpublic charities such as private foundations.

These rules don’t cover every situation and donors are advised to seek counsel from their tax advisor. Rarely are two financial situations identical and it is important to consider the unique circumstances surrounding any gifting decision. Your Clifford Swan investment counselor is ready to assist in your gifting decisions and their execution.

"Rarely are two financial situations identical and it is important to consider the unique circumstances surrounding any gifting decision."

As yearend approaches and another is ready to begin, we often think of what we can give to others less fortunate or to causes that we believe are worthy of supporting. Proper yearend charitable tax planning and the use of charitable deductions can increase our giving potential.

"Proper yearend charitable tax planning and the use of charitable deductions can increase our giving potential."

Download Article: Yearend Charitable Giving Tax Planning 

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