BY BILL POWELL
Since the 1950s OWAA has been classified as a tax-exempt public charity. Public charities are strongly favored by the Internal Revenue Code. This piece will explain how those who care about OWAA and other public charities can strengthen them and save taxes while doing so.
If done in ways approved by the Code, each gift to an organization like OWAA can be deducted from the giver’s taxable income. When this happens, the giver is taxed as if he or she never received as income the amount of the gift being made. It’s like using a cafeteria plan or a health savings account to pay for health care, you get to use before-tax dollars rather than after-tax dollars. Under income tax laws, this amounts to part of the gift being made by the giver and part by the IRS, since both are foregoing something they otherwise would have. There are limits to the deductions that a person can claim on his or her annual income tax returns for such gifts, based on the giver’s total amount of income and the total of recent charitable gifts made.
The Code also imposes a gift tax under some situations and an estate tax under some situations. Under the recent “fiscal cliff” law, named the American Taxpayer Relief Act of 2012, the rules remain that there are unlimited amounts that may be deducted on both gift and estate tax returns for amounts given to organizations like OWAA. Those with a billion dollars could leave it all to OWAA, and the gift would be funded approximately 60 percent by what could have passed to others from the giver and about 40 percent by what would otherwise have gone to the IRS. This effect is the same whether the gift is made during lifetime or at death.
Since public charities are exempt from paying income taxes, a well-motivated donor can get the biggest bang for his or her buck by giving away assets that are presently carrying a heavy load of income taxes that will be due whenever they are cashed in. Such assets include retirement funds such as IRAs or 401(k) plans or 403(b) plans (which will be included in the taxable income of whoever draws them out, unless that person is a tax-exempt charity), and appreciated assets such as land, buildings, or corporate stocks (which carry as freight the capital gain that will become taxable as income when the asset is sold).
Gifts to charities like OWAA either during lifetime or at death put them outside the calculation of the estate tax due at death. After the ATRA was passed and signed by President Obama on Jan. 2, 2013, the tax rate that applies is a flat 40 percent of all taxable assets in excess of $5.25 million per taxpayer.
Many estate planning clients are shocked to learn what the IRS considers their taxable wealth. This is because it includes things that most people don’t think of as accessible wealth, such as the proceeds of life insurance, the balances in IRAs, retirement funds, annuities and such, and the current market value of real estate acquired long ago.
There is always an income tax benefit to the giver from a gift made to a charity during lifetime. There is sometimes an enormous additional benefit in the form of reduced estate tax by having the property out of your taxable estate. Also, if you make a charitable gift now rather than waiting until death you have a chance to see the gift put to good use and be thanked personally for it.
If you are wealthy enough to have an estate tax concern, it would be accurate to say that some charity will benefit from part of your wealth at your death. If you don’t choose a different charity, it will be the IRS.
Perhaps most importantly for those who care about OWAA and wish for it to have continued success beyond the 85-year history it already has, every gift to it will help it assure such success, and in its hands the gifts are not subject to any of the taxes discussed here.
A few years ago, after a decades-long debate, the OWAA Board pounded out a Gift Acceptance Policy that accommodated the competing concerns that had made large gifts sometimes difficult for OWAA to accept. That policy is printed in the Directory and is available at www.owaa.org/about. It contains detailed discussion about how to make gifts to OWAA of 11 different kinds of property.
I spend much of my time in my own law practice advising clients about estate planning matters, and would be happy to assist your own estate planner in implementing any desire you might have to benefit OWAA. ◊
A member since 1994, Bill Powell is from Columbia, Mo. He is OWAA’s legal counsel. Besides practicing law, he writes irregular newspaper columns and features, and is an award-winning photographer. He authored the “Legal Handbook for Freelancers,” which is available from OWAA. His other pursuits include mountaineering, hunting, fishing, backpacking, running, travel, growing grapes, and making wine. Contact him at firstname.lastname@example.org.
BY BILL POWELL