Gift Planning Tips

Reducing Tax for a Charitable Cause

A taxpayer whose employer provides group-term life insurance coverage of more than $50,000 is subject to income tax on the value of the excess coverage, computed using the Uniform Premium Table, not the employer’s actual cost [Reg. §1.79-3(d)(2)].  There is a way for employees to avoid the added tax: Make charity the sole beneficiary of all or a part of the excess amount for the entire year.  For example, an employee age 56 is provided with $300,000 of group-term coverage.  The amount included in the employee’s gross income is as follows:

Excess coverage: $250,000

Annual cost per $1,000 of excess coverage: $5.16

Annual cost of excess coverage taxable to the employee: $1,290

If the employee makes $50,000 of the excess coverage payable solely to charity for the entire taxable year, the annual cost to the employee is reduced to $1,032 ($50,000 x $5.16/$1,000 = $258).  The taxpayer is not entitled to a charitable deduction, but does enjoy tax savings during the year.

Even Volunteers Need to Keep Records

Charitable volunteers are not allowed deductions for their time, but can deduct the cost of certain out-of-pocket expenses, such as transportation to and from the volunteer location (14¢ per mile for use of personal vehicle), reasonable expenditures for meals and lodging while away from home performing volunteer services [Reg. §1.170A-1(g)] and the cost of a uniform.  No charitable deduction is allowed for travel expenses while away from home unless there is no significant element of personal pleasure, recreation or vacation [Code §170(j)].

Charity is required to provide acknowledgments to volunteers who present evidence of out-of-pocket expenses of $250 or more [Reg. §1.170A-13(f)(10)].  The acknowledgment should describe the services provided by the volunteer and make a good faith estimate of the value of any goods or services received in return.  Charity does not have to verify the value of the volunteer’s deduction, but the volunteer should retain records or receipts to substantiate the claimed expenses.  No acknowledgment is required for expenses of less than $250, although volunteers should maintain records such as mileage, tolls, parking or the cost of public transportation.

Charity Benefits Early, But Nothing Extra for Donor

Clients creating charitable remainder trusts can include qualified contingencies that will cause the trusts to terminate early upon the happening of a specified event [Code §664(f)].  One of the most well-publicized examples of a qualified contingency was in the estate plan of hotel tycoon Leona Helmsley.  She established a charitable remainder trust for her grandchildren that would terminate early if they didn't visit their late father’s grave at least once a year.

There is no additional charitable deduction if the contingency triggers an early termination for the remainder trust [Code §664(f)(2)].  For example, if a grandparent funds an inter vivos charitable remainder trust that will last for ten years while the grandchild is in college and graduate school, with the contingency that the trust will end earlier if the grandchild does not continue his or her education, the grandparent is not entitled to an additional income tax charitable deduction if the trust ends when the grandchild opts not to attend graduate school.

Watch Timing in Gifts of Stock

A client who owns closely held stock that is the subject of a tender offer can use the shares to make a charitable gift or to fund a life-income arrangement such as a charitable remainder trust, but timing is crucial.  If the gift is made or the trust is funded prior to approval of the sale by the board or shareholders, the client avoids or reduces any capital gains.  However, if sale negotiations have progressed to the point where the charity or the trustee of the remainder trust is obligated to relinquish the stock, the client will be required to report capital gains under an assignment of income theory [Allen v. Commissioner, 66 TC 340].  Capital gains will be recognized where charity is “legally bound” or can be compelled to sell (Rev. Rul. 78-197).


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