Special Incentives For Giving Before December 31

Disasters Produce Record Levels of Outreach to Support Those In Need
Over the last four years, the world has responded with incredible generosity to support the victims of an unprecedented series of disasters. To provide tax relief to the victims and to encourage charitable giving to fund relief efforts, on September 23, 2005, President Bush signed the Katrina Emergency Tax Relief Act of 2005 (KETRA).

Tax Incentive for Gifts to All Charities
Recognizing that increased giving has limited donations to other charities, KETRA includes a special provision to encourage additional gifts of cash this year to support all charities. In describing the Act, Senator Grassley of Iowa stated "Our goal is to encourage charitable giving outside of Katrina relief, to prevent the rest of the nation's charities from seeing a downturn in giving as they did after September 11."

Under existing law, the income tax charitable deduction for an individual who makes cash donations to charity is limited to 50% of the donor's adjusted gross income (AGI). In years where these charitable gifts of cash exceed 50% of AGI, the donor can carry forward the deduction into future years. Under KETRA, taxpayers can deduct their charitable gifts of cash for up to 100% of their adjusted gross income, provided the gifts are made between August 28, 2005 and December 31, 2005. Some highlights include:

Individual cash contributions may be made to any qualified public charity, even if the charity is not engaged in Katrina relief. Private foundations, donor advised funds, supporting organizations, and charitable remainder trusts are not public charities and do not qualify.

Gifts must be made in cash between August 28, 2005 and December 31, 2005.

The income tax charitable deduction for these cash gifts will not be subject to the tax reduction rule that reduces itemized deductions by 3% for taxpayers with AGI over $145,950.

Corporate deductions (normally limited to 10% of taxable income) are deductible up to 100% if gifts are made directly to Katrina relief before December 31, 2005.

Illustration
Ani and Levon have an adjusted gross income in 2005 of $100,000. They have already made gifts of $25,000 for the victims of Hurricanes Katrina and Rita and $25,000 to support the Fund for Armenian Relief. Upon hearing of the recent disaster in Pakistan, Ani and Levon were planning to make an additional $10,000 gift to support relief efforts. In prior years that gift would not be deductible on their 2005 income tax return because they have reached the 50% of AGI limit. Ani and Levon are pleased to learn that under KETRA, they can now make their earthquake relief donation and it will be fully deductible in 2005.

2005 Gift Opportunities with IRAs and Qualified Retirement Plans
By increasing the maximum deduction allowable for cash gifts, taxpayers over age 59 ½ may also have a special opportunity for the rest of 2005 to withdraw excess funds from their qualified retirement plans (e.g. IRA, 401k, 403(b)) and donate them to charity. Under KETRA, such withdrawals will be added to adjusted gross income, but then will be fully deductible. Removing assets from an over-funded qualified retirement plan in this way during life may provide significant tax savings for taxpayers subject to federal gift and estate tax, as these assets can be taxed at more than 70% of their value at death under current law.

While some individual taxpayers would benefit from this opportunity, you should consult with your own tax advisors to determine if this approach is right for you. Because taking distributions from a retirement plan increases adjusted gross income, personal exemptions as well as deductions for medical expenses, casualty losses and other itemized deductions may be more limited. In addition, state and local income taxes could be higher.

For More Information
The Fund for Armenian Relief stands ready to assist you and your advisors as you consider your charitable strategies this year and for the future. For more information, please contact us.

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