Thanks for the reading the 25 Days of Giving series! Each day through December 25, I’m covering different aspects of charitable giving for both donors and nonprofit leaders. Have a topic you want to be covered or questions you want answered regarding charitable giving? Contact me.
The vast majority of public and private universities and colleges are tax-exempt entities as defined by Internal Revenue Code (IRC) Section 501(c)(3) because of their educational purposes and/or the fact that they are state governmental entities. If this is the case, have you ever wondered why tuition for a student to attend a university is not deductible as a charitable contribution? This is known in gift law as as a “personal benefit” transfer. The personal benefit of education for the student is equal to the tuition paid. Because of the benefit value, there is no charitable gift and therefore no federal income tax charitable contribution deduction.
Another example of personal benefit transfer would be payment to a charity for specific services, and such payments are not deductible. In Hernandez v. Commissioner, the U.S. Supreme Court determined gifts of fixed amounts to the Church of Scientology (a tax-exempt religious organization) in exchange for personal counseling were not deductible. The Court held that such “gifts” were more appropriately considered payments for services rather than charitable contributions.
If you ever have a question if a charitable gift is tax deductible, don’t hesitate to contact me. It never hurts to get a second opinion on potential personal benefit situations, especially if the opinion can mean potentially avoiding an IRS audit.
https://www.gordonfischerlawfirm.com/wp-content/uploads/2015/05/freestocks-org-475745.jpg37995698Gordon Fischerhttps://www.gordonfischerlawfirm.com/wp-content/uploads/2017/05/GFLF-logo-300x141.pngGordon Fischer2019-12-10 23:11:232020-05-18 11:28:4125 Days of Giving: What the Personal Benefit Transfer Means for Charitable Contributions
Passed in 2017, the Tax Cuts and Jobs Act ushered in many changes, including an increase in the standard deduction. The deduction for single filers is now $12,200 and $24,400 if you are a married joint-filer. In reality, this means that the number of households claiming the itemized deduction (including their exempt charitable donations) is much less compared with previous tax schemes. But, fear not. There are strategies to clear the initial standard deduction threshold.
What the Heck is Bunching?
One of the major options available to charitable donors is to “bunch” donations. To bunch donations you make larger charitable donations this year in a way that exceeds the standard deduction and then smaller ones next year to compensate. Depending on your charitable giving capacity and goals, this means you could alternate every other year or every few years.
By way of example, instead of giving you “normal” $5,000 to charity annually, consider accelerating your gift two years worth of donations in 1 year. So you would end up giving $10,000 every two years. The $10,000 is the same amount you planned to give over the two years but strategically donated in a way that maximizes itemized tax benefits. With this option, you may claim your itemized deductions over the limit one year and then take the standard deduction the next.
If you’re considering bunching donations, you may want to do so through a donor-advised fund (or DAF), which offers a unique level of donative flexibility. The DAF allows you to make charitable contributions and receive an immediate tax break for the full donation, even though you can choose to recommend grants to your fave nonprofits from the fund at a later date and over time.
Questions about bunching or how to maximize your charitable donations under current federal and state tax laws? Don’t hesitate to contact me for a free one-hour consultation!
https://www.gordonfischerlawfirm.com/wp-content/uploads/2018/12/Screen-Shot-2018-12-24-at-10.54.52-PM.png6701046Gordon Fischerhttps://www.gordonfischerlawfirm.com/wp-content/uploads/2017/05/GFLF-logo-300x141.pngGordon Fischer2019-12-09 21:35:522020-05-18 11:28:4125 Days of Giving: Donation Bunching
Thanks for reading the 25 Days of Giving series! Plan on coming back to the blog every day from now through Christmas Day.
Tangible personal property is a fancy way of saying “stuff,” such as a painting, computer, furniture, and collectibles (excluding securities, cash, and real estate). So, if you want to donate your stuff to your favorite charity, what are the tax consequences?
Related Use
The amount of your federal income tax charitable deduction depends on the concept of “related use.” If appreciated tangible personal property is considered related to the charity’s exempt purpose, the deduction is based on fair market value (FMV) and available to the extent of 30% of your adjusted gross income (AGI).
If property is considered unrelated to the public charity’s exempt purpose, you must reduce the FMV by any amount that would have been long-term capital gain had you sold the property for its fair market value. (In short, if the FMV was greater than the basis in the property, your deduction is limited to your basis.)
To sum it up: in order for a donor of tangible personal property to be able to deduct its full FMV, the charity must use the object in a manner that is related to its (the charity’s) exempt purpose. A classic example is the gift of a piece of art, like a sculpture or painting, to an art museum.
Hypothetical
This concept of “related use” can have very profound tax consequences. For instance, assume Jill Donor owns a painting which is now worth $100,000, but Donor purchased it for only $20,000.
If Donor gives this painting to an art museum that keeps and displays the painting, Donor can deduct the painting’s full $100,000 FMV. If Donor gives the same painting to, say, a nature conservancy, which will sell the painting and use the proceeds, Donor can deduct only her $20,000 cost.
Note, that even if the object is potentially related to the charity’s mission–such as a painting given to an art museum–if the charity’s intention is to sell it upon receipt, then the gift is not for a related use and the donor’s deduction will be limited accordingly.
From our hypothetical, it doesn’t necessarily have to be gifted to a museum to be considered for a related use. In Private Letter Ruling 9833011, the IRS ruled that a gift of art to a Jewish community center would be for a related use, as the artwork had both religious and cultural significance. Also, a painting gifted to, say, a hospital may be for a related use if the hospital will display it in a common area so that it helps foster a healing environment for patients.
Takeaway
The big takeaway for nonprofits? Nonprofit boards and staffs should know and understand about “related use,” so they can recognize the issue if it arises.
The big takeaway for donors? Donors should obtain in writing the charity’s intent to use the property for a purpose related to its mission.
https://www.gordonfischerlawfirm.com/wp-content/uploads/2015/11/ben-white-178531.jpg40166016Gordon Fischerhttps://www.gordonfischerlawfirm.com/wp-content/uploads/2017/05/GFLF-logo-300x141.pngGordon Fischer2019-12-08 18:28:312020-05-18 11:28:4125 Days of Giving: "Related Use" in Charitable Gifts of Tangible Personal Property
25 Days of Giving: What the Personal Benefit Transfer Means for Charitable Contributions
Charitable Giving, Taxes & FinanceThanks for the reading the 25 Days of Giving series! Each day through December 25, I’m covering different aspects of charitable giving for both donors and nonprofit leaders. Have a topic you want to be covered or questions you want answered regarding charitable giving? Contact me.
The vast majority of public and private universities and colleges are tax-exempt entities as defined by Internal Revenue Code (IRC) Section 501(c)(3) because of their educational purposes and/or the fact that they are state governmental entities. If this is the case, have you ever wondered why tuition for a student to attend a university is not deductible as a charitable contribution? This is known in gift law as as a “personal benefit” transfer. The personal benefit of education for the student is equal to the tuition paid. Because of the benefit value, there is no charitable gift and therefore no federal income tax charitable contribution deduction.
Another example of personal benefit transfer would be payment to a charity for specific services, and such payments are not deductible. In Hernandez v. Commissioner, the U.S. Supreme Court determined gifts of fixed amounts to the Church of Scientology (a tax-exempt religious organization) in exchange for personal counseling were not deductible. The Court held that such “gifts” were more appropriately considered payments for services rather than charitable contributions.
If you ever have a question if a charitable gift is tax deductible, don’t hesitate to contact me. It never hurts to get a second opinion on potential personal benefit situations, especially if the opinion can mean potentially avoiding an IRS audit.
25 Days of Giving: Donation Bunching
Charitable GivingPassed in 2017, the Tax Cuts and Jobs Act ushered in many changes, including an increase in the standard deduction. The deduction for single filers is now $12,200 and $24,400 if you are a married joint-filer. In reality, this means that the number of households claiming the itemized deduction (including their exempt charitable donations) is much less compared with previous tax schemes. But, fear not. There are strategies to clear the initial standard deduction threshold.
What the Heck is Bunching?
One of the major options available to charitable donors is to “bunch” donations. To bunch donations you make larger charitable donations this year in a way that exceeds the standard deduction and then smaller ones next year to compensate. Depending on your charitable giving capacity and goals, this means you could alternate every other year or every few years.
Reminder, substantiated donations to a qualified nonprofit can be combined with mortgage interest and state/property taxes when calculating excess above the standard deduction limit. (The Greater Kansas City Community Foundation created a useful illustrated chart of this concept.
Bunching in Practice
By way of example, instead of giving you “normal” $5,000 to charity annually, consider accelerating your gift two years worth of donations in 1 year. So you would end up giving $10,000 every two years. The $10,000 is the same amount you planned to give over the two years but strategically donated in a way that maximizes itemized tax benefits. With this option, you may claim your itemized deductions over the limit one year and then take the standard deduction the next.
Donor-Advised Fund
If you’re considering bunching donations, you may want to do so through a donor-advised fund (or DAF), which offers a unique level of donative flexibility. The DAF allows you to make charitable contributions and receive an immediate tax break for the full donation, even though you can choose to recommend grants to your fave nonprofits from the fund at a later date and over time.
Questions about bunching or how to maximize your charitable donations under current federal and state tax laws? Don’t hesitate to contact me for a free one-hour consultation!
25 Days of Giving: “Related Use” in Charitable Gifts of Tangible Personal Property
Charitable Giving, NonprofitsThanks for reading the 25 Days of Giving series! Plan on coming back to the blog every day from now through Christmas Day.
Tangible personal property is a fancy way of saying “stuff,” such as a painting, computer, furniture, and collectibles (excluding securities, cash, and real estate). So, if you want to donate your stuff to your favorite charity, what are the tax consequences?
Related Use
The amount of your federal income tax charitable deduction depends on the concept of “related use.” If appreciated tangible personal property is considered related to the charity’s exempt purpose, the deduction is based on fair market value (FMV) and available to the extent of 30% of your adjusted gross income (AGI).
If property is considered unrelated to the public charity’s exempt purpose, you must reduce the FMV by any amount that would have been long-term capital gain had you sold the property for its fair market value. (In short, if the FMV was greater than the basis in the property, your deduction is limited to your basis.)
To sum it up: in order for a donor of tangible personal property to be able to deduct its full FMV, the charity must use the object in a manner that is related to its (the charity’s) exempt purpose. A classic example is the gift of a piece of art, like a sculpture or painting, to an art museum.
Hypothetical
This concept of “related use” can have very profound tax consequences. For instance, assume Jill Donor owns a painting which is now worth $100,000, but Donor purchased it for only $20,000.
If Donor gives this painting to an art museum that keeps and displays the painting, Donor can deduct the painting’s full $100,000 FMV. If Donor gives the same painting to, say, a nature conservancy, which will sell the painting and use the proceeds, Donor can deduct only her $20,000 cost.
Note, that even if the object is potentially related to the charity’s mission–such as a painting given to an art museum–if the charity’s intention is to sell it upon receipt, then the gift is not for a related use and the donor’s deduction will be limited accordingly.
From our hypothetical, it doesn’t necessarily have to be gifted to a museum to be considered for a related use. In Private Letter Ruling 9833011, the IRS ruled that a gift of art to a Jewish community center would be for a related use, as the artwork had both religious and cultural significance. Also, a painting gifted to, say, a hospital may be for a related use if the hospital will display it in a common area so that it helps foster a healing environment for patients.
Takeaway
The big takeaway for nonprofits? Nonprofit boards and staffs should know and understand about “related use,” so they can recognize the issue if it arises.
The big takeaway for donors? Donors should obtain in writing the charity’s intent to use the property for a purpose related to its mission.
I want to help you, whether you’re a nonprofit organization or donor, wisely maximize your charitable giving. Don’t hesitate to reach out by phone (515-371-6077) or email (gordon@gordonfischerlawfirm.com).