A Primer on Charitable Income Tax Deductions and the Concept of Income Tax Savings
Each year, many of us breathe a collective sigh of relief when April 16 rolls around. Aside from those filing for extensions, and aside from those few who are affected by lesser-known categories, the majority of Americans have completed the filing of their annual income tax returns.
Now that the frenzy of “tax season” is over, we can shift gears and look at issues we pushed aside prior to April 15. One of the most frequent questions we at PG Calc receive from our clients is regarding the “tax savings” line on the Summary of Benefits Projection chart. And in order to understand the tax savings concept, we need to understand the charitable income tax deduction. For planned giving professionals, the charitable deduction has always been at the focus of the process, rather like the proverbial pot of gold at the end of the rainbow.
Quick Tip: Customize Your Disclaimer Statement in PGM Anywhere
From the Blog: BDQ #11 – What Is the IRS Discount Rate, and Why Does It Change Every Single Month?
CGAs and Bargain Sale Basis
Several States Pass RIFT Legislation
PG Calc Connected with Old Friends and New at the PGGNE All-Day Conference
Who Couldn’t Do with More of Craig Wruck’s Fundamentals of Planned Giving?
In-Person Training in Boston August 5-6
Client Testimonial: Queens College Relies on PG Calc
PG Calc FREE Webinar: Gift Annuity Regulations and Compliance Q&A
Just starting to consider registering in states to issue gift annuities, or perhaps revisiting it as a recurring topic? Puzzling over a particular CGA annual filing requirement? Trying to make sense of the registration picture after moving to a new organization? Get all your charitable gift annuity state registration and annual filing questions answered for free by PG Calc experts, Gift Annuity Compliance Director Edie Matulka and Senior Senior Advisor Julie Goldenberg Hay, during this hour-long webinar. As an attendee commented the last time we gave this session, think of this as your CGA therapy hour!
Quick Tip: Customize Your Disclaimer Statement in PGM Anywhere
PGM Anywhere offers charities the opportunity to customize their charts and proposals in a variety of ways, including using custom language in the disclaimer statement that appears at the bottom of each chart, graph, and diagram.
The default disclaimer in PGM Anywhere is: “This document contains confidential information. These calculations are for illustration purposes only and should not be considered legal, accounting, or other professional advice. Your actual benefits may vary depending on several factors, including the timing of your gift.”
To customize your disclaimer:
Choose Customize > Disclaimers.
To edit PGM Anywhere’s default disclaimer, click the Edit icon to the left of “For illustration purposes only,” then enter your preferred language in the Disclaimer text: field.
To create an alternate disclaimer, click the Add icon (green “+”) below the list of disclaimers, then enter the disclaimer text. For instance, you might want to use an alternate disclaimer when you want to indicate that the data contained within the chart is confidential.
Click Save when you have completed editing the default disclaimer or have entered a new one.
To select a disclaimer, choose Personalize in the left navigation, then choose it from the Disclaimer menu.
If you have questions, reach out to Client Services at 888-474-2252 or support@pgcalc.com.
From the Blog: BDQ #11 – What Is the IRS Discount Rate, and Why Does It Change Every Single Month?
If you have ever run a calculation for a gift annuity or a charitable remainder trust, you have seen a specific number – usually somewhere between 4% and 6% – labeled as the “IRS Discount Rate” or the “Section 7520 Rate.” (Some planned giving connoisseurs like to call it the “CMFR.”) For many of us, this is just a mysterious number that suddenly appears to determine how much of an income tax deduction our donors get.
In simple terms, the 7520 rate is the IRS’s way of saying, “If the donor kept this money and invested it themselves, this is the interest rate we assume they would earn.” But where does this Discount Rate come from, and why is it so restless?
Charitable gift annuities (CGAs) are a form of bargain sale in which the donor “sells” to the charity an item (including cash) for less than its value and receives annuity payments over their lifetime. When a CGA is funded with non-cash assets, the cost basis of the asset is a necessary part of the calculation. To understand why, it is important to unpack how a bargain sale operates.
A bargain sale is a simple agreement in which the donor sells securities, real estate, tangible personal property, or other assets to a charity for less than their current value. The donor earns an income tax deduction for the difference between the fair market value of the donated assets and the sale price, subject to IRS 30%/50% limitations.
If the donor donates long-term appreciated property as a bargain sale, the donor must report the capital gain that is attributable to the sale portion of the transaction. To determine the capital gain, the cost basis must be allocated between the sale and donation portions. For example, if the donor sells an $80,000 asset with a $20,000 basis to charity for $32,000 (40% of the value):
Sale price = $32,000 Basis allocated to the sale = $8,000 (40% of $20,000) Taxable gain = $24,000 ($32,000 - $8,000) Charitable deduction = $48,000 ($80,000 - $32,000)
When the bargain sale takes the form of a CGA, the sale proceeds are the total annuity payments discounted over the life expectancy of the annuitants using the IRS discount rate available. This is called the investment in contract, which is based on the date of the gift and the date of birth of the annuitant(s). The deduction is the difference between the fair market value of the asset and the investment in contract. Using the example above, a 72-year-old donor/annuitant “sells” an $80,000 asset with a $20,000 basis to fund a CGA for the charity.
Sale price (investment in contract) = $49,810 (62% of the value) Basis allocated to the sale = $12,452 (62% of $20,000) Taxable gain = $37,358 ($49,810 - $12,452) Charitable deduction = $30,190 ($80,000 - $49,810)
When funding a CGA with appreciated property, the donor must provide the cost basis to determine the capital gain assigned to the annuity payments. If the donor’s investment manager is reluctant to provide basis, perhaps explaining that a CGA is, in essence, a bargain sale will trigger the transfer of the cost basis information. If the donor does not provide cost basis, then the basis should be entered as $0, which is not the best option because the donor/annuitant will report more capital gain income and less tax-free income. Be sure to ask the donor for the basis when discussing life income gifts funded by stock, real estate, or other appreciated assets.
If you have questions, our Client Services team is here to help.
Several States Pass RIFT Legislation
In just the past few weeks, Tennessee and Nebraska have joined Iowa, Indiana, and Colorado by passing a RIFT (“Release IRA Funds Timely”) law. A RIFT law makes it easier for charities to collect beneficiary proceeds from retirement accounts, investment accounts, insurance policies, and any other non-probate transfer on death accounts. Illinois, Missouri, and California may do the same before their respective legislative sessions end. This is great news!
The RIFT Project, conceived and led by Johni Hays, has been working tirelessly for years to make it easier for charities to collect beneficiary proceeds from IRAs and other financial accounts. Among its many efforts, the RIFT Project has developed a model state law for states to adopt. The model law instructs financial institutions to distribute beneficiary proceeds to charities in a timely manner without requiring personal information from anyone connected to the charity. This is now the law in five states, which soon may become eight. This momentum could help with the ongoing effort in Washington, D.C. to pass a federal version of the RIFT law so that it is easy for charities in every state to collect beneficiary proceeds.
The National Association of Charitable Gift Planners maintains a great resource on this issue here.
PG Calc Connected with Old Friends and New at the PGGNE All-Day Conference
May 6th was an action-packed day at the Planned Giving Group of New England’s All-Day Conference at the Bentley University Conference Center. PG Calc Senior Advisor Craig Wruck taught the Fundamentals of Planned Giving workshop ahead of the conference. Senior Director of PG Calc’s Marketing Services Andrew Palmer rotated off the PGGNE Board after a four-year term serving as Director of Communications. We are thrilled that Senior Director of Planned Giving Services Kara Morin will be joining the PGGNE Board (seen above fine-tuning her musical skills).
We enjoyed seeing old friends and meeting new ones and attending a robust day of sessions learning about AI, DAFs, marketing, strategies for reunions, gift administration, creative gift planning, and more. We even raffled off a free BatchCalcs personalized gift illustration project to a lucky winner! It was a great conference, and we were glad to attend and proud to support PGGNE.
Who Couldn’t Do with More of Craig Wruck’s Fundamentals of Planned Giving?
Nationally-known planned giving expert and PG Calc Senior Advisor Craig Wruck will repeat his popular Fundamentals of Planned Giving online course as a series of four weekly PG Calc Webinars.
Craig combines a deep technical understanding of the topic with a widely-admired talent for focusing on what is important and making gift planning concepts easy to grasp. Major topic areas he will cover are: Tax Fundamentals, Basic Planned Giving Methods, Assets Used for Charitable Contributions, and Advanced Planned Giving Methods during four online sessions July 7, 14, 21, and 28.
On August 5-6, we will be holding in-person trainings in Boston: Gift Planning with PGM Anywhere Introductory and Advanced. These hands-on trainings are a great opportunity to develop your planned giving knowledge and leverage PGM Anywhere software to close more gifts. We offer both introductory and advanced classes, and you can choose either or both.
August 5 Introductory Session: We use case studies to introduce planned giving concepts, covering immediate and deferred gift annuities, remainder trust basics, and gifts made utilizing the IRA QCD provision for CGAs.
August 6 Advanced Session: Explore advanced gift plans including flip CRUTs, retained life estates, charitable lead trusts, and gift plans using funds from traditional IRAs.
Client Testimonial: Queens College Relies on PG Calc
“I’ve been working in Planned Giving since the early 2000s. I use PG Calc mainly for gift annuity projections but also for charitable remainder trust proposals. I called Jeffrey Frye to walk me through a CRT projection for one of our trustees, and as always, PG Calc customer service is first rate. He walked me through the projections. He was incredibly helpful. I highly recommend PG Calc. It’s been integral to the work I do in Planned Giving.”
Mary Amoon-Hickey,
Director of Planned Giving
Queens College, CUNY
Learn more about Queens College and the City University of New York
