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KETRA Offers Tax Relief through Temporary Charitable Giving Incentives
The Katrina Emergency Tax Relief Act of 2005 (P.L. 109-73) (KETRA) provides certain tax incentives for charitable giving that individuals and businesses may want to consider. In addition to special deductions for giving shelter to hurricane evacuees and a tax credit for Hurricane Katrina relief employees, KETRA removes certain deductible limits for charitable contributions for a limited period of time, even if the contributions have no connection with Hurricane Katrina.
Options for Individual Donors
Individual contributions to tax-exempt charitable organizations are generally subject to certain percentage limitations of adjusted gross income. The deductibility of contributions to charities described in IRC §170(b)(1)(A), essentially “public charities,” is generally limited to 50% of a taxpayer’s adjusted gross income (known as the 50% limitation). Any excess contributions can be carried over for a five-year period. Charitable contributions are also subject to the phase-out of itemized deductions (known as the 3% haircut).
KETRA provides that cash gifts made by individual donors from August 28, 2005 through December 31, 2005 to public charities are not subject to the 50% limitation, even if the donations are made to qualified charities having no connection with Hurricane Katrina. Additionally, these contributions are exempt from the application of the phase-out of itemized deductions for high-income taxpayers. Gifts to private foundations, supporting organizations and donor-advised funds do not qualify for this benefit.
KETRA further provides certain individual donors with charitable-giving opportunities not previously available. Certain donors may consider withdrawing funds from their qualified plans or IRAs and donating the cash to public charities. Under KETRA, they would be able to deduct 100% of such gifts in 2005, as itemized deductions not subject to the 3% haircut if made during the specified time period. (Note: Donors under the age of 59½ will continue to incur the early distribution penalties on retirement plan withdrawals to make charitable contributions. Furthermore, the additional income to be reported by the retirement plan withdrawal would result in increased adjusted gross income, potentially causing accelerated phase-out of other itemized deductions and higher floors for deductibility of medical and other deductions.)
Additional Corporate Provisions
For corporations, KETRA also provides a benefit related to charitable contributions, which are generally not deductible to the extent that they exceed 10% of a corporation's taxable income computed without regard to net operating loss or capital loss carrybacks (known as the 10% limitation). However, under KETRA, a corporation may deduct qualified contributions up to its entire taxable income, less other contributions. Qualified donations exceeding this amount are carried forward for five years as contributions to which the 10% limitation applies. However, unlike individual donations, corporate contributions must be made for relief efforts related to Hurricane Katrina in order to escape the 10% limitation.
If you would like more information about the provisions of KETRA and how they may apply to your charitable giving plans for the remainder of 2005, please contact Gregg M. Simon.
Gregg M. Simon, Chair of the firm's Wealth Transfer & Succession Planning group, concentrates his practice in estate planning, federal estate and gift taxation, probate and trust administration, and business planning. He can be reached at 312.521.2605 or gsimon@muchshelist.com.
This alert should not be construed as legal advice or a legal opinion on any specific facts or circumstances.
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