Consider purpose, method when giving to charities

Did you ever take part in a white elephant gift exchange? The strategy for many is to bring a gift that gets the most laughs. For others, it is a chance to give away an unwanted item, yet there always seems to be one gift that gets the most attention and activity. Why? That gift is useful. By giving away the item, the giver extends its usefulness. At the end of the game, both the giver and the recipient have benefited.

What does this have to do with charitable giving? Giving benefits both the giver and recipient, and wise giving extends the usefulness of the gift. But making a gift count requires thoughtful planning. Here are six steps for an effective giving strategy:

1. What does the giver want to accomplish? For some, the primary motive for giving is the use of the gift, or how the recipient organization will use the cash or property. For others, a prime consideration is the tax deduction. To be deductible, the gift must satisfy six requirements:

• It must be made in the form of cash (which includes checks) or property.
• The giver does not receive anything in return that exceeds the value of the gift.
• The recipient organization is a qualified charity.
• The amount complies with legal limits.
• The gift is made before the end of the tax year.
• The gift is properly substantiated.

Taxpayers have the choice of itemizing deductions or taking the standard deduction when preparing their income tax returns. Charitable gifts are deductible only if the taxpayer itemizes deductions. Even then, the amount deductible is limited, but the taxpayer can carry over the excess and may be able to take a deduction in future years.

2. Is the amount consistent with the giver’s strategy? An effective and orderly giving strategy can remove assets from the taxpayer’s estate, thereby mitigating or eliminating federal estate and gift taxes. Generally a gift is taxable to the recipient unless a specific exception applies.

One of the exceptions is the annual gift exclusion rule. This rule permits a taxpayer to give cash or property up to a $12,000 value (for 2006) to an unlimited number of recipients. Gifts that exceed this amount may require filing a gift tax return along with the payment of federal gift taxes.

Couples can also participate in gift splitting, which allows the exclusion amount to double per recipient per tax year. So in 2006, a couple can give cash or property up to $24,000 for an unlimited number of recipients.

Givers should take into account what they can afford when determining the amount of the gift. Sometimes givers see a need and feel burdened to give without proper consideration to their own financial situations. Trusted friends and family members can be helpful when trying to decide an amount that is appropriate and practical.

3. Whom does the giver wish to benefit? Not all recipient organizations are reputable. The media seem to be full of stories about those who take money from willing and caring donors only to use it for personal gain. Others spend pennies on the dollar toward charitable efforts.

Some diligence goes a long way toward making the gift count. Before giving, research the organization. Log on to the Internal Revenue Service’s Web site www.IRS.gov/charities for information on charitable organizations and giving. Many 501(c)(3) organizations, such as churches, are automatically exempt from filing for 501(c)(3) status while others are covered under a group exemption ruling and may not be listed separately on the site. Southern Baptist Convention (SBC) churches and many related agencies and institutions are covered by a group exemption letter.

What does this mean? Gifts to individuals are not deductible, so be aware of efforts that solicit funds for a specific individual. Remember, to be deductible, a gift must be “to or for the use of” the charitable organization. If the charitable organization uses gifts to further the work of individuals, such as its foreign missionaries, the gift is generally deductible, subject to the satisfaction of the other giving rules.

4. How can giving be tax-efficient? Generally all gifts are potentially taxable unless a specific exclusion applies. Gifts to charitable organizations within legal limits and gifts that do not exceed the annual exclusion amount are not taxable to the giver. Other noteworthy rules:

• Individual contributions of $250 or more and certain other contributions in excess of $75 require substantiation issued by the recipient organization.
• Special substantiation rules apply to noncash property with a value of $500 or more.
• Noncash gifts of $500 or more must attach a qualified appraisal summary (Form 8283). Affected taxpayers file this form with their tax returns for the year in which the property is contributed, and the deduction is claimed on the tax return.

There is good news for some Individual Retirement Account (IRA) owners. The Pension Protection Act of 2006 created a new charitable incentive that is available for tax years after Dec. 31, 2005, through Dec. 31, 2007.
Referred to as a qualified charitable distribution, IRA owners who are at least age 70.5 can make tax-free distributions to most charitable organizations, including churches and 501(c)(3) organizations such as The Baptist Foundation of Alabama and other affiliates of the Alabama Baptist State Convention.

Programs like Adopt An Annuitant, sponsored by GuideStone Financial Resources of the SBC, are also included in this category. To take advantage of this incentive, the IRA owner must have reached age 70.5, and the IRA trustee must directly transfer the distribution to the charitable organization. Even if the IRA owner uses the standard deduction on the income tax return, this incentive is available. Also the tax-free distribution does not count in determining the taxpayer’s normal charitable deduction.

The tax-free distribution is limited to $100,000 per taxpayer per taxable year. In addition, the distribution is not tax-free if the IRA owner receives an economic benefit from the recipient organization that exceeds the value of the gift given. Special distribution rules apply if any part of the distribution is attributable to nondeductible contributions.

The Pension Protection Act also includes some charitable reform provisions. One pertains to the recordkeeping requirements for certain charitable contributions. Beginning in 2007, a contribution of money in any amount must be substantiated by a cancelled check, bank record or receipt from the recipient organization. The documentation must include the date and amount of the contribution.

Failure to keep appropriate records may result in a disallowed deduction, back taxes and interest penalties.

5. Why is the timing of a gift important? Because the timing of the gift determines the deductibility. To claim a charitable deduction, the taxpayer must deliver the gift before the end of the applicable tax year.

But there is one exception. A check mailed to a charitable organization postmarked before the end of the tax year is deductible even if it is received after a new calendar year.

In addition, giving before one’s death is preferable because it ensures consistency with the taxpayer’s giving strategy. Because post-death giving can be more complex, it is best to consult a tax adviser or attorney so that the appropriate documents are in place. Otherwise the taxpayer’s giving strategy may not be realized.

6. Gift methods. Which method best supports the giving strategy? Many options are available, ranging from a one-time gift to providing a legacy. Some of the more notable alternatives include:

• Outright gifts of cash or appreciated securities
• Gifts of life insurance
• Gifts by wills or trusts
• Charitable remainder trusts
• Charitable lead trusts
• Charitable gift annuities
• Gifts of real estate with lifetime occupancy
• Memorial gifts.

Direct gifts of cash or appreciated property are often the easiest to accomplish. Taxpayers who want to make the most of their gifting, however, should consider methods that provide a more lasting benefit, such as gift annuities and certain trusts.

Professional help is essential. Many organizations have staff who are professionally trained in giving strategies.
Assistance may be available at no cost to the giver, and many can prepare the needed legal documents to ensure the legacy of the gift.

And talk with your tax or financial adviser about what’s right for you.

The needs are many. Congress has acknowledged these needs and responded by enacting incentives to facilitate giving. Former Sen. Bob Dole summed up the importance of giving in defining the meaning of life, “When it’s all over, it’s not who you were. It’s whether you made a difference.”

EDITOR’S NOTE — Sherre Stephens is a certified employee benefits specialist and director of executive and institutional benefit design for the SBC’s GuideStone Financial Resources.