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KATRINA
EMERGENCY TAX RELIEF ACT OF 2005 (KETRA)
In the aftermath
of Hurricane Katrina, President Bush signed KETRA on September
23, 2005, creating tax relief provisions to encourage charitable
contributions to both Katrina relief organizations and other public
charities. If you made a cash gift after August 27, 2005, or plan
to make one before the end of the year to a public charity - including
the I.P. Hunt Foundation (IPHF) - you could gain new income tax
benefits and they are significant.
Pursuant to KETRA,
you may now deduct cash gifts made to public charities, including
the IPHF, up to one hundred percent (100%) of your Adjusted Gross
Income (AGI) if you itemize your deductions and make these gifts
between August 28, 2005 and December 31, 2005. In addition, the
three percent (3%) overall reduction on itemized deductions for
certain individuals is also suspended for gifts made during this
time period. Individual cash gifts are not restricted to hurricane
relief organizations and may be given to any public charity. Due
to this significant change in the law, many donors may wish to increase
or accelerate gifts to public charities during the remainder of
this calendar year. KETRA may allow a donor to reduce their overall
taxes to zero.
WHO
BENEFITS MOST FROM KETRA
1. Donors
contemplating significant gifts over the next several years.
2. Donors
with existing multi-year pledges.
3. Donors
over the age of 59½ who are interested in making a gift from an
IRA, 401 (k) or other qualified retirement plan by taking a lifetime
distribution.
4. Donors who
sell assets such as stock, mutual funds or real estate in order
to donate cash by December 31, 2005.
SUMMARY
OF LAW & EXAMPLES PRIOR TO KETRA
1. 50% Limitation
for Cash Gifts to Public Charity Prior to KETRA, itemized charitable
deductions for individuals making gifts of cash and certain other
property to public charities is limited to fifty percent (50%)
of their "Contribution Base" -- hereinafter referred to simply
as Adjusted Gross Income (AGI). Example (50% limitation of AGI):
John and Mary have AGI of $50,000. The maximum cash charitable
contribution deduction would normally be $25,000 (50% of $50,000
AGI).
2. 30% Limitation
for Certain Gifts to Public Charity For gifts of appreciated capital
gain assets (typically stocks, bonds, mutual funds, real estate,
etc.) the normal maximum charitable deduction is reduced to thirty
percent (30%) of AGI. Example (30% Limitation of AGI): Lisa owns
100 shares of ABC common stock with a fair market value of $25,000
that she purchased in 2000 for $10,000. If she gives the stock
to a public charity, the value of the deduction is the stock value
of $25,000; however, her deductible amount for 2005 is limited
to $15,000 (30% of $50,000 AGI). The excess $10,000 charitable
deduction amount may be carried forward for up to five years.
3. Overall
3% Reduction on Itemized Deductions for Certain Individuals Current
law requires a reduction of specified itemized deductions (including
charitable gifts) by three percent (3%) of the amount by which
AGI exceeds $145,950 for a married couple filing a joint return
or single taxpayer (or $72,975 for married persons filing separate
returns.) Example (3% Reduction on Itemized Deductions): Bob and
Sue, married and filing a joint tax return, have AGI of $300,000.
Their normal allowable itemized deductions are reduced by $4,621
($300,000 AGI less $145,950 equals $154,050 as multiplied by 3%).
Thus, if their otherwise allowable itemized deductions totaled
$20,000, their overall itemized deductions will be reduced by
$4,621 resulting in an actual deduction of $15,329 (in lieu of
the full amount of $20,000).
SUMMARY
OF CURRENT LAW AND EXAMPLES FOLLOWING KETRA
1. Suspension
of 50% Limitation for Cash Gifts to Public Charities KETRA temporarily
suspends the 50% limitation of AGI for cash gifts made to public
charities for gifts made between August 28, 2005 and December
31, 2005. In other words, KETRA provides individuals the opportunity
to make cash gifts up to 100% of AGI to further reduce overall
taxes. Example (Suspension of 50% Limitation): John and Mary with
AGI of $50,000 may make and deduct cash gifts to public charities
between August 28 and December 31, 2005 of $50,000. John and Mary
reduce their taxes to zero by making this gift.
2. 30% Limitation
for Certain Gifts to Public Charity Still Applies KETRA does not
change the law regarding gifts of certain appreciated assets.
As stated above, for gifts of appreciated capital gain assets
(typically stocks, bonds, mutual funds, real estate, etc.) the
normal maximum charitable deduction is reduced to thirty percent
(30%) of AGI. KETRA only applies to cash gifts made to public
charities.
3. Suspension
of Overall 3% Reduction on Itemized Deductions for Certain Individuals
KETRA temporarily suspends the 3% reduction on itemized deductions
for cash gifts made between August 28 and December 31, 2005 by
certain individuals. In other words, the 3% limitation does not
apply for cash gifts made during this time period for those individuals
with AGI exceeding $145,950 for a married couple filing a joint
return or single taxpayers (or $72,975 for married persons filing
separate returns.) Example (Suspension of 3% Reduction): Bob and
Sue with AGI of $300,000 may similarly give and deduct cash gifts
of $300,000 between August 28 and December 31, 2005.
There is no reduction
in itemized deductions for AGI in excess of $145,950. Bob and Sue
reduce their taxes to zero by making this gift.
FREQUENTLY
ASKED QUESTIONS
- Q. How
did this opportunity come about?
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- A. Congress
wanted to encourage charitable support for those affected by
the ravages of the hurricane, but also wanted to encourage donors
to continue to support other charitable interests in addition
to their gifts for relief efforts. KETRA does not require charities
receiving charitable gifts from individuals be engaged in providing
direct relief efforts to Katrina victims. Senator Grassley of
Iowa was quoted as saying " 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."
Q. Why
do I need to act now?
A. The new
tax benefits expire December 31, 2005 .
Q. Why
does the I.P. Hunt Foundation qualify?
A . The I.P.
Hunt Foundation is an IRS recognized 501(c)(3) non-profit publicly
supported charity established over 30 year ago.
Q. If I
make cash gifts to more than one organization do they all qualify
for a waiver of the 50% cap?
A. Yes , if
the organizations receiving the cash contributions all qualify
as public charities.
Q. If I
make a gift of stock, mutual fund, real estate or any other appreciated
capital gain property prior to December 31, 2005 to a public charity,
do I also qualify for the deduction cap waiver?
A. No , only
gifts of cash or cash equivalents qualify for the waiver. Checks
and credit card gifts are considered cash equivalents.
Q. Does
this apply to charitable gifts to private foundations, supporting
organizations, charitable remiander trusts, or donor advised funds?,
A. No , a
contribution to a private foundation, supporting organization,
charitable remainder trusts or a donor advised fund would not
qualify for the higher deduction limit.
Q. I have
heard that the new law (KETRA) allows me to deduct 100% of my
charitable contributions to organizations like IPHF from my federal
income tax. Is that true?
A. Yes , prior
to this legislation, a taxpayer who itemizes his/her deductions
could deduct charitable cash contributions up to 50% of his/her
AGI. The new legislation removes the 50% limitation and allows
taxpayers who itemize to deduct 100% of charitable cash contributions
given between August 28, 2005 and December 31, 2005 .
Q. Can
I make my gift to IPHF with a check or through a credit card?
A. Yes , check
and credit card gifts are considered cash equivalents and qualify
as cash gifts under the KETRA legislation.
Q. I would
like to mail my contribution to the I.P. Hunt Foundation . Where
should I send it?
A. Checks,
including a transmittal letter specifying the purpose of the gift,
may be mailed directly to:
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- I.P.
HUNT FOUNDATION (IPHF)
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DISASTER EMERGENCY RELIEF FUND
c/o U.S BANK
Anthem Branch Office
10140 South Eastern Avenue
Henderson, Nevada 89052
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EXAMPLES
ILLUSTRATING HOW DONORS COULD BENEFIT FROM KETRA BY MAKING
CASH GIFTS FROM AUGUST 28, 2005 THROUGH DECEMBER 31, 2005
1.
Liquidating highly appreciated assets to make a cash gift Jim
has owned XYZ common stock for 10 years. The stock is now worth
$100,000; Jim's cost basis (what he paid for it) is $25,000. He
has talked about setting up a $100,000 Women's Council Scholarship
endowment in honor of his mother, but is unsure how he can come
up with the funding. Jim has been reluctant to sell the XYZ stock
because of the $75,000 potential capital gain. KETRA provides
a unique opportunity to sell the stock, realize the capital gain,
make a cash gift of $100,000 to endow the scholarship, and deduct
$100,000 of the gift, which will offset the gain and then some
from the stock sale.
2. Liquidating
loss assets to make cash gift Bill owns a parcel of land worth
$50,000 that he purchased in 2000 for $75,000. His 2005 AGI is
$200,000 including capital gain distributions from mutual funds
of $50,000. Bill wants to make a gift to help fund a building
project for seniors. Bill could sell the land for $50,000, use
the $25,000 loss on the sale to offset the mutual fund distributions
and reduce his AGI, and then make and deduct in full a cash gift
for the building in the amount of $50,000.
3. Accelerating
pledge payments Margaret has an outstanding IPHF pledge balance
of $100,000 and has been making annual pledge payments of $25,000.
Margaret's AGI for 2005 will be $100,000. Under the terms of KETRA,
Margaret could pay off the entire pledge balance of $100,000 and
be able to deduct the entire payment if made in cash. Prior to
KETRA, Margaret would have been able to deduct $50,000 (50% of
$100,000 AGI) in 2005 and the excess $50,000 charitable deduction
may be carried forward for up to five years.
4. Gifts from
IRA's or other qualified retirement plans during lifetime Kathy
is 62 years old and has a qualified 401(k) plan worth $1.5 million.
Her adjusted gross income for 2005 is $100,000. She is interested
in creating an endowment for library support in the amount of
$200,000. She could withdraw $200,000 from her 401(k) plan and
make a cash gift to IPHF for the Library Endowment in her name.
This will increase her income to $300,000 ($100,000 plus $200,000
retirement plan withdrawal); however, now all of the $200,000
she withdrew from the 401 (k) plan is deductible without any reduction
for the amount in excess of 3% of AGI. There is no penalty for
Kathy's withdrawal because she is older than 59 1/2, the minimum
age for distributions.
CAUTION:
State and local income tax rules could minimize the benefits of
KETRA on an individual basis. PLEASE
BE SURE TO CONSULT YOUR OWN PROFESSIONAL ADVISORS ON ALL LEGAL,
TAX OR FINANCIAL ISSUES RELATED TO KETRA OR ANY OTHER TAX LAW. THE
INFORMATION CONTAINED IN THIS DOCUMENT IS FOR EDUCATIONAL PURPOSES
ONLY AND SHOULD NOT BE CONSIDERED LEGAL, TAX OR FINANCIAL ADVICE.
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FOR
MORE INFORMATION
If you have
any general questions or want to speak with a representative from
the I.P. Hunt Foundation about this special planning opportunity,
please contact Irvin D. Hunt, Executive Director 877.711-7751
or please contact your personal tax advisor today.
Further information
regarding KETRA from the IRS and the US Congress, Joint Committee
on Taxation, can be found at:
- http://www.irs.gov/newsroom/article/0,,id=149391,00.html
http://www.house.gov/jct/x-69-05.pdf
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