Article last updated: October 22, 2012
Philanthropy is a tax, albeit a voluntary tax. It is the way we in America support education, social services, the needy and religion. Without this, our government would have to assume the responsibility of funding these services. This could only be accomplished through taxes. Most people believe that providing services through governmental bureaucracy is very inefficient and expensive. If this is true, then all of our taxes are lower than they would otherwise be if Americans did not generously support these needed causes. Therefore, such contributions are really a tax (a substitute
for taxes) and a debt that all of us owe. By giving we reduce the country’s overall taxes, but we can also benefit personally as a result of our tax code structure. These benefits are of a financial nature but also a personal nature since donating funds to charity, and I may add time and services, can be a very rewarding experience.
This article is based upon the tax laws now in effect and on the assumption that the tax code structure will not change even though rates, exemptions and deductions may be modified. Examples of tax savings resulting from charitable donations and bequests are listed below. These calculations are based on a 33 percent federal income tax rate, a 6 percent state income tax rate and a 35 percent estate tax rate with no state inheritance tax.
A $100,000 cash donation could reduce the donor’s income taxes by $39,000 (33 percent plus 6 percent), resulting in an after tax cost of $61,000.
If the donor dies shortly after this donation, then his estate would have been reduced by $100,000, resulting in an estate tax saving of $35,000, further reducing the after-tax cost of this donation to $26,000 ($61,000 minus $35,000). In this example, our federal and state governments will have subsidized about 75 percent of this donation.
If the donor does not want to part with this prior to his death, he could bequeath $100,000 to a surviving spouse, or if his estate is not subject to estate taxes, then to his children with a request that they donate $100,000. This would reduce the cost of this donation to the family unit to $61,000 since there would be a $39,000 income tax saving. If a donor wants to donate to a particular charity in his will rather than parting with the amount during his lifetime, it may make more financial sense to bequeath the amount of the proposed donation to a surviving spouse or children with a request that the recipient donate the funds to the charity. This donation method provides an income tax benefit to the family unit and does not deprive the donor of the use of these funds during his lifetime. An estate tax benefit is not applicable since this taxpayer would have had no estate taxes to pay.
All lawyers have a debt to the Louisiana Bar, particularly since our professional fees have not been subjected to sales taxes. We also don’t have to buy an occupational license. Therefore, we are obliged to support the Louisiana Bar. One of the best ways to support the Bar is through contributions to the Louisiana Bar Foundation (LBF), whose funds are used for Bar-related causes. The LBF will work with a donor to dedicate a contribution for a particular use.
There are many vehicles available to transfer assets to charitable institutions which, for tax purposes, are known as 501(c) (3) entities. The first question is what type of property should be donated; the second, how should the donation be made.
Donations can be made in cash or with capital gain or other property. A likely subject of a gift is publicly held securities that have been held by the taxpayer for more than a year. If securities held for more than a year are donated rather than cashed, then the donor would avoid the capital gain taxes due if securities were sold.
Donations also can be made of a remainder interest in property with the donor retaining an income equivalent, i.e., an amount equaling a percent of the value of the property, or can be made of the income if the donor wants to retain the principal. These various donation alternatives include Charitable Remainder Unitrust, Charitable Remainder Annuity Trust and Charitable Lead Trust. Gifts made to a 501(c)(3) entity should be coordinated with personal estate planning objectives such as the taxpayer retaining the income interest or remainder interests or transferring those interests to others.