Philanthropy and Taxes

Most people make a planned gift to their church or a church-related organization because they believe that this is part of their vocation as Christians. This is part of being a good steward.  However, in addition to strengthening the ministry of the church, individuals may enjoy other benefits when they make a gift.

The most familiar benefit of making a planned gift is the one that is available to those who make any kind of gift: the charitable deduction.  For gifts of cash, you may use your deduction for up to 50% of your adjusted gross income (AGI), whereas for gifts of appreciated assets like stocks the figure is  30%. If you can't make use of the full available amount of your deduction in the year of your gift, you need not worry -- you will be able to "carry over" the balance of your deduction for up to five additional tax years.

Another benefit is the ability to take assets with low-income streams, like stock dividends, and through your planned gift, convert them into something with a higher-income stream, some of which may be tax-free.

In planning your philanthropy, you should be aware of tax law.  In 2001 the U.S. Congress passed the Economic Growth and Tax Relief Reconciliation Act (EGTRA). This legislation stipulated a number of significant changes in income and estate taxes for the years 2001-2010.  The Act is currently set to expire in 2011 unless Congress chooses to renew all or part of the legislation.

Individual Income Tax Rate Reductions

The Act contains a new 10 percent rate for a portion of taxable income that is currently taxed at 15 percent. This rate became effective in tax year 2001.

The current income tax rates will be decreased over six years. The new rates are summarized as follows:

Retirement Savings Provisions

Beginning in 2002, the annual limit for employee contributions to a 401(k) or 403(b) plan is was increased from $10,500 to $11,000. Allowable contributions increase by $1,000 per year until a ceiling of $15,000 is reached in 2006.

The annual IRA contribution limit was increased from $2,000 to $3,000 for 2002-2004; to $4,000 for 2005-2007; and $5,000 beginning in 2008.

If you are taxpayer aged 50 or older the the 401(k)/403(b) and IRA contribution limits are even higher. The 401(k)/403(b) elective deferral limits were increased by an additional $1,000 per year beginning in 2002 until $5,000 is reached in 2006. These additional contributions may be made regardless of any other limit applicable to these plans. The IRA limit is further increased by $500 for the years 2002-2005, and then $1,000 in 2006 and thereafter.

Beginning in 2006, employees will be able to deem certain 401(k) and 403(b) contributions as after-tax Roth IRA contributions, avoiding tax on the investment buildup.

Estate, Gift, and Generation-Skipping Transfer (GST) Tax Provisions

Estate and gift tax rates and unified credit exemption(the amount an individual can transfer to heirs free of estate tax) were also changed as a result of the legislation.

Gift taxes are not repealed so that gifts to individuals during your lifetime above a total of $1,000,000 will be subject to tax.

Finally, in 2010, the repeal of the estate tax will be accompanied by the repeal of the "step up basis provision."  At present, when appreciated property is inherited through someone's, the cost basis of appreciated property like stocks and real estate is "stepped up" to the fair market value at the time of death. (e.g., a stock purchased at $1/share that at the time of death trading at $25/share is "stepped up" to $25/share -- your heirs pay no capital gains on the $24 appreciation in value). Usually no capital gains tax is owed on the sale of that property. This will change in 2010; since there will not be a full "step up," capital gains taxes may be owed when the heirs choose to sell the appreciated assets they received via the will. (Note:Appreciated property passing to a surviving spouse will be stepped up as much as $4,300,000; property passing to children will be stepped up by as much as $1,300,000.)

The Implications of Tax Reform on the Massachusetts Estate Tax

The Tax Relief Act of 2001 not only has implications for one's Federal estate taxes, but also for one's Massachusetts estate taxes. Individuals and families should be aware of these developments when developing their estate plans.

In the past, the Federal exclusion rate and Massachusetts filing threshold were the same. This changed, beginning in 2003, with the latter figure being significantly lower than the former. Thus, while one's estate may not be subject to Federal estate tax, it may very well be liable to state estate tax.

Given the fact the continuing changes to Federal estate tax law, individuals are encouraged to revisit their estate plans on a regular basis.