David Lerner Associates: Charitable Deduction

David Lerner Associates: Charitable Deduction

Core Facts

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What exactly is the charitable deduction?

The charitable deduction allows you to take off the value of property you offer to charity from your property and might minimize any federal gift and estate tax that might be owed. Charitable gifting allows you to satisfy your personal philanthropic desires and satisfy your estate planning objectives.

You might wish to give to the charitable community out of commitment, moral obligation, altruism, kindness, or a feeling of responsibility. Or you may want to give because you believe you will do a better job of distributing your wealth than Uncle Sam. No matter what your inspiration, charitable giving should be gratifying.

Gifts to charity can also satisfy your estate planning objectives. There are no limits on the amount that you can pass to charity. It is possible to transfer your entire estate to charity, tax free. Gifts to charity allow you to:

  • Distribute your property tax free
  • Potentially put the amount subject to estate taxes into a lower bracket

Caution: However, keep in mind that property you give to charity is property that does not go to your heirs. Don't let your effort to save taxes have the unintentional effect of depriving your heirs.

In what way does a gift or bequest of property qualify for the charitable deduction?

Particular conditions and requirements must be met to qualify for this deduction:

  • You must make the transfer, perhaps throughout life or at death by will, rather than your executor or heirs
  • The property must be transferred to a qualified charity for a charitable purpose. A qualified charity includes:

1. The United States, any state, the District of Columbia, and any local government

2. Certain religious, scientific, or charitable organizations

3. Certain veterans’ organizations

4. Certain fraternal organizations

5. An employee stock ownership plan if the transfer is a qualified gratuitous transfer of qualified employer securities

Caution: Gifts or bequests to individuals, regardless of how needy or worthy the individuals are, cannot qualify for the charitable deduction

Tip: The IRS publishes a list of charitable organizations (the Cumulative List) to which gifts or bequests will qualify for this deduction The IRS does not specify what a qualifying charitable purpose is. Having said that, it has issued Letter Rulings that discuss what has been allowed or disallowed, and it has privately ruled that charitable purpose means the same for gift tax and estate tax purposes as it does for income tax purposes. Generally, a charitable purpose means a public purpose, as opposed to a private purpose.

  • Depending on the year in which you die, the gift or bequest must be included in your estate for estate tax purposes. The amount of the deduction is the value of the property transferred, but the amount cannot exceed the value of the property that is required to be included in your estate.
  • You must be a U.S. citizen or resident at the time you make the gift.

Tip: A charitable deduction is allowed for nonresident noncitizens, but only certain types of charities qualify.

  • Generally, the gift must be a present interest-- A present interest means that the donee (the person or organization you give to) has the unrestricted right to the instant use, possession, or enjoyment of the property, or the income from the property, from the moment you make the gift. The deduction is not available to gifts of future interests in property.

Technical Note: "Future interests" is a legal term and includes reversions, remainders, and any other delayed interest that postpones the commencement of the use, possession, or enjoyment of the property, or income from the property.

Tip: Gifts of future interests may qualify for the deduction if the gift is structured as a partial interest gift. Partial interest gifts (property rights given to both charitable and noncharitable interests, e.g., a trust paying income to charity, with the remainder going to noncharitable beneficiaries) may qualify for the deduction if the donated property is transferred to an IRS-approved form of charitable trust, such as a charitable lead trust, charitable remainder trust, or pooled income fund.

How does one utilize charitable deduction?

For lifetime gifts, the charitable deduction is allowed for the year in which the gift is made for federal gift tax purposes. You don't need to file an annual gift tax return if all gifts made for a given year fully qualify for the charitable deduction.

Distinct guidelines regarding the charitable deduction

The amount of the charitable deduction is limited to the amount of the transfer actually made. Special rules apply if the transfer to charity first must bear a portion of any estate taxes because of the calculation difficulties that arise. Estate taxes are a function of the charitable deduction and the charitable deduction is a function of the estate taxes.

Tip: The interrelated computation can be avoided by providing a specific bequest to the charity, instead of a gift from the residuary estate.

An example of using the charitable deduction

Example(s): Ron is a small-business owner in the town where he was born and raised. He is a well-liked and respected member of the community. Ron feels he should give back to his community and donates money every year to support the town's zoo, hospital, library, children's center, church, and other local charities.

Example(s): During the years 2007 through 2011, Ron gave $500,000 in total to different charities. Each year, Ron filed a gift tax return but paid no gift tax because the gift tax charitable deduction offsets his taxable gifts each year, Ron also filed an income tax return, reducing his taxable income by the amount of income tax charitable deduction allowed. Say Ron dies in 2013 and that his will provides for a charitable bequest in the amount of $100,000, with the residuary estate passing to his only nephew, James. Ron's executor reduces Ron's taxable estate by $100,000 (allowed by the estate tax charitable deduction), which then reduces the estate tax owed. Ron's executor pays the estate tax owed and then distributes the residuary estate to James.

Charitable IRA rollover gifts

The Pension Protection Act of 2006, the Emergency Economic Stabilization Act of 2008, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, and the American Taxpayer Relief Act of 2012 allow donors over the age of 70 1/2 to make tax-free charitable distributions of up to $100,000 directly from their IRAs.

Donors who have reached age 70 1/2 can direct amounts (subject to the aforementioned $100,000 limit) to charity in satisfaction of their minimum required distribution so long as the following requirements were met:

  • The donor is age 70 1/2 at the time the gift is made.
  • The charitable gift is made directly from an IRA to the charity.
  • An individual can give a maximum of $100,000 in 2013. A spouse can give an equal amount from his/her IRA.
  • Individuals can make as many gifts in any amount to as many charities as desired as long as the total does not exceed $100,000 for 2013.
  • The gift cannot be made in exchange for a charitable gift annuity or to a charitable remainder trust.
  • The gift cannot be made to a private foundation, donor-advised fund, or supporting organization (as described in IRC Section 509(a)(3)).

Tip: At the election of the taxpayer, charitable IRA rollover gifts made in January 2013 can be treated as made on December 31, 2012. Also, certain IRA distributions made in December 2012 may be treated as charitable IRA rollover gifts if transferred in cash to the charitable organization soon after the distribution and prior to February 2013. A person can make a charitable IRA rollover gift for 2012 utilizing these provisions and a charitable IRA rollover gift for 2013.





Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities. 

To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable-- we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

Some of this material has been provided by Broadridge Investor Communications Solutions, Inc.

David Lerner Associates does not provide tax or legal advice. The information presented here is not specific to any individual's personal circumstances. Member FINRA & SIPC.


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Founded in 1976, David Lerner Associates is a privately-held broker/dealer with headquarters in Syosset, New York and branch offices in Westport, CT; Boca Raton, FL; Teaneck and Princeton, NJ; and White Plains, NY. For more information contact David Lerner Associates Call 516-921-4200 Visit our website: http://www.davidlerner.com

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Jake Mendlinger
Account Manager
516.829.8374 X 232

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