NO LIMITATIONS ON CASH GIFTS TO AQUINAS COLLEGE - 100% DEDUCTIBLE AGAINST 2005 INCOME
November 28, 2005 - Hurricane Katrina Relief Tax Package
On September 21, 2005, the House and Senate unanimously passed the Hurricane Katrina Tax Relief Package (H.R. 3768). The bill was signed on Friday, September 23, 2005 by President Bush.
House Ways and Means Chair Bill Thomas (R-CA) stated, "It's important that this tax legislation is signed into law quickly to help ease that burdens on those affected by Hurricane Katrina."
Sen. Max Baucus (D-MT) approved of the bill and noted, "Passing this tax package and getting it to the president is the first step in tackling the devastating circumstances Katrina has left behind. We are also working to provide long-term tax help, but today's package will give urgent relief so victims can start picking up the pieces and putting their lives back together."
Senate Finance Chair Charles Grassley (R-IA) also was pleased and stated, "The immediate-relief package will help get short-term aid to hurricane victims by encouraging food donations and the employment of displaced individuals, for example. For those who've suffered casualty losses, we've liberalized the tax rules to permit affected taxpayers to deduct losses from damaged property."
As part of the Katrina Hurricane Relief Tax Package (H.R. 3768), Sec. 301 permits charitable gifts up to 100% of income. This provision effectively permits unlimited IRA withdrawals and gifts to charity, including Aquinas College. Many individual donors may make IRA 2005 withdrawal-gifts.
Cash Gifts Prior to Dec 31, 2005 - No Limitation on Cash Gifts, 100% deductible against 2005 income.
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Guide to IRA 2005 Gifts
What is the new 2005 IRA gift concept?
Congress wanted to help charities assisting in the Hurricane Katrina relief. So they decided to allow unlimited gifts to charity up to a donor's total income.
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 Under the new 100% of income charitable gifts option, the withdrawn funds may be given in full to charity.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 IRA 2005 Gifts plan 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. 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.
When is this 100% gift deduction rule applicable?
Qualifying cash gifts must be made between August 28, 2005 and December 31, 2005.
How should a donor make this 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 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 there other income tax limits that are affected?
Usually, for higher income taxpayers, 3% of itemized deductions are not allowed. For cash gifts to charity between Aug. 28 and Dec. 31 of 2005, the 3% reduction does not apply. 100% of the gift is deductible. It appears that the IRS will treat these charitable deductions as itemized deductions not subject to the 3% rule.
Will state income taxes be a factor?
Some states have no income tax, some follow the federal 50% AGI deduction limit with five year carry forward and some have different rules. 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. Some donors may take the IRA withdrawal, give 95% to charity and use the remaining 5% to cover other tax costs.
Will there be other income tax effects?
There may be for some donors. When adjusted gross income is increased, deductions such as medical deductions or casualty deductions with "floors" to the deductible amount may be affected. The 3% floor should not be affected. If the IRS follows the statute language, the 3% floor should not be lifted by the qualified charitable gift, since the gift is not subject to the 3% adjustment. If the 3% floor is lifted, then the effect would be to subject the gift at least in part to the adjustment.
Which charities qualify for the 100% deduction?
Public charities generally will qualify.
Must the IRA 2005 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 an IRA 2005 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.
Could you share gift examples?
Mary IRA Owner is a retired teacher. She has income this year of $40,000. Mary makes gifts each year to his favorite charity. With $40,000 of income, she normally can give and deduct up to one-half of income, or a maximum of $20,000 per year. She is age 74 and has an IRA of $850,000. Mary wants to make a major gift this year to his favorite charity. She withdraws $50,000 from her IRA, and her income is now $90,000. Mary gives the $50,000 to his favorite charity by December 31, 2005 and deducts the $50,000. Her income for tax purposes is reduced to the original $40,000.
Mary IRA Owner has income this year of $200,000. During her years in business she built up a large IRA. When she retired three years ago, she sold the business and rolled her qualified retirement plan over into an IRA. She has an IRA of $4,000,000 and wants to help her favorite charity with a large gift. Mary withdraws $1,000,000 from her IRA, and her income is now $1,200,000. She gives the $1,000,000 to charity by December 31, 2005 and deducts the $1,000,000. Her income for tax purposes is reduced to the original $200,000.
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2005 End-of-the Year Giving Deadlines
Aquinas College very much appreciates those who include the College in their end-of-the-year giving plans. Gifts to Aquinas College must be postmarked before midnight on December 31, 2005 to be processed and receipted in the 2005 calendar year. Gifts delivered in person must be received by the College prior to 5 p.m. EST on Friday, December 30 to be processed and receipted in the 2005 calendar year.
Questions or need more info? Contact Julie Ridenour at email@example.com, or at (616) 632-2808.