Charitable Giving

Vol. 30 No. 6

By

Lisa A. Runquist (lisa@runquist.com), a principal in the law firm of Runquist & Associates (runquist.com) in Northridge, California, has 35 years of experience representing nonprofit organizations and is the winner of the Outstanding Lawyer Award and the Vanguard Award.

As we approach the end of the year, one concern that often arises is how to reduce your overall tax burden. A common step is to make one or more charitable contributions. Is this a good idea? If you decide to give, what organization(s) are worthy of your contribution? And what type of contribution are you prepared to make?

Do Charitable Contributions Reduce Your Taxes?

A charitable contribution deduction is generally available when you give to an organization that is exempt under Section 501(c) (3) of the Internal Revenue Code. However, there are several things that should be noted:

Do you really have a desire to make a charitable contribution? Tax benefits should never be the principal basis for making a gift to a nonprofit organization (although taxes might impact the timing of your gift). If you have had a good year and you want to share the wealth, then by all means, you should do so. Or if you have a burden to assist others, whatever your income, there are organizations in existence that have been formed for just about any charitable purpose you desire, standing in line to take your money.

However, your actual tax benefit depends on your tax rate; the higher your tax rate, the more you will benefit. But there is not a dollar-for-dollar contribution deduction available; even if you have a high tax rate, you will still end up with less money than if you did not make a charitable contribution (e.g., your taxes, when added to the amount you gave away, will always be greater than the taxes you would pay without such a contribution). Less will go to the government, as the amount you keep, plus the amount the nonprofit receives, is more than the amount you would keep if you did not make the contribution. But again, your purpose in making the contribution should be charitable in nature, not tax avoidance.

You should also note that deductions may be taken only if you itemize deductions on Schedule A of your tax return. If you do not have sufficient income or deductions to itemize on Schedule A, there will be no tax benefit available to you.

You might also note that, for several years, Congress has considered doing away with the charitable contribution deduction. As of the time of writing this article, there was no momentum toward such a change in the law, but there is no guarantee that such a change will not occur.

You must have evidence of your contribution. You must make sure that you have hard evidence of your contribution. This can be in the form of a canceled check. And normally the organization will provide you with a receipt acknowledging the charitable contribution (this is required if the contribution exceeds $200). Gone are the days when you could throw $10 in the collection plate or the Salvation Army kettle and claim a contribution deduction.

You can’t receive anything of value in exchange for your contribution. A “contribution” in exchange for tickets to a concert or in exchange for allowing your child to attend a school (rather than paying tuition) or in any other situation where you get back a significant benefit does not result in a charitable contribution. To be a deductible charitable contribution, the gift must be without strings. There may be situations where a portion of the gift is deductible; for example, if you paid $200 for a ticket to a dinner dance, and the actual value was only $100, you are entitled to a deduction of $100. However, in such a situation the nonprofit must inform you of the tax deductible portion.

How Do You Decide What Organization to Support?

You may already have an organization or organizations in mind to which you want to contribute. For example, you may already be actively involved in your local church or temple, your local YMCA, or your community orchestra. If you are already actively involved, you may know enough about its operations to assure yourself that a charitable contribution will be used in a manner that effectively carries out the mission of the organization.

But what if you are not sure if the organization is well run or will actually do what it has promised to do?

Obtaining copies of informational returns. One step you can take is to actually ask the organization to provide you with copies of its Form 1023 (Application for Recognition of Exemption) and its last three Forms 990 (Annual Information Return). With the exception of church-type religious organizations (churches, synagogues, temples, mosques, etc.), which are exempt from filing, if the organization does not provide these forms or does not let you know where they can be found (e.g., on its website), it is actually in violation of the law. You might ask why this institution is not either more informed of its obligations or more forthcoming concerning its activities.

The last three Forms 990, as filed with the Internal Revenue Servivce (IRS), are also directly available at guidestar.org. If you would rather look at the form without contacting the organization, or if the organization is not prompt in furnishing the forms, this is an easy way to get a feel for what the organization is doing and how it is spending its money.

To date there is no similar website to look at organizations’ Forms 1023, which are the original filing made by the organizations to establish their tax-exempt status with the IRS. However, the law requires that the form be made available by the organization if it was filed after July 15, 1987, or if, on that date, it had a copy of the application available. The Form 1023 gives you an idea of the original purposes/activities of the organization (which may have changed since that filing).

What to look for on the return. After you have obtained a copy of the Forms 990 and/or the Form 1023, the first thing to do is compare different years to see what changes have been made, especially in the purpose and use of funds. This can give you an idea of whether the organization is still in a start-up mode, is in a transition, or has an established operation. Some people prefer to assist start-up operations; others want to see their money used for an already-established purpose. Either way, you will want to see if the activities of the organization conform to the purposes you wish to support. You also might look at the organization’s website, if any, to compare its representations on its site with its statements to the IRS.

Some potential contributors are concerned with the amount of money that goes to fund-raising. Clearly, if most of the money is going to the solicitor and not to the organization, additional questions should be asked. Sometimes this might be justified (when an organization is first establishing itself, some of the fund-raising programs may do little other than break even—and sometimes the fund-raising itself is a way of raising awareness of the cause). However, most people would not want to give if they knew that most of the money went to the solicitor rather than being used to advance the charitable purpose of the organization.

Other potential donors have expressed concern about the amount of money used for administration rather than directly on charitable activities. The amount of justifiable administrative expenses really depends on the type of organization and its activities. For example, a health center is required to spend a significant amount of time and effort making sure that the organization complies with a multitude of governmental regulations, in addition to actually providing health care. This is significantly different from a community organization that relies almost entirely on volunteers to staff the office operations. It is not possible simply to use a generic figure that is appropriate for the amount spent on administration without looking at the specific entity to see for what that money is spent.

A principal reason that organizations have their exempt status revoked is the use of funds to benefit a person rather than the purpose of the organization. Many of the questions on the Form 990 are designed to determine if the organization is operated to benefit those operating the organization, rather than a charitable purpose; the answers may give the reader insight into whether this is an organization deserving of support.

Will People Know You Contributed?

Schedule B to Form 990 requires that the nonprofit list all the substantial contributors to the organization. This information may be used by the IRS to cross-reference charitable contribution deductions taken by contributors or to check whether a large donor has received an inappropriate benefit.

This information is not required to be made public along with the rest of the Form 990. However, if the nonprofit is a public foundation that files Form 990-F, it is required to be disclosed. This should be taken into consideration by contributors who do not want their charitable contributions to be a matter of public record.

How Can You Give?

Most beneficial to the organization is a cash gift that has no strings attached. Such a gift can be used wherever needed, and the organization does not have to wait for the funds.

Some individuals wish to put restrictions on their gifts. You can make a restricted gift for a specific purpose, but not for a specific person. For example, you can limit the use of the funds for the construction of a new facility (of course, you also might want to think about what should be done with the funds if that facility is not built). However, you cannot require that the funds be used for a specified individual, such as your friend who is undergoing medical treatment. This is not a well understood area. If a nonprofit is, as part of its purposes, assisting such individuals, you can give to its fund and ask that the gift be used to assist your friend. Before it can do so, the nonprofit must make sure that your friend actually has a need and take whatever other steps are necessary to ensure that the assets are used for charitable purposes, even if this means that some or even all your contribution is used in another manner. This is because Section 501(c)(3) of the Internal Revenue Code prohibits the use of charitable assets in a manner that inures to the benefit of a private individual.

If you want to make a contribution this year and you do not simply want it to go into the general fund but you don’t know exactly how you want it used, you can set up a “donor-advised fund.” The donor-advised fund agreement will allow you to advise the organization at a later time how you would like it to use the money. Again, the organization has to make sure it is used for a charitable purpose, but most organizations are happy to comply with your request, to the extent possible.

Another way to make a contribution is through a pooled income fund, a charitable remainder annuity trust, or a charitable remainder unitrust. Although a complete discussion of these financial instruments is beyond the scope of this article, suffice it to say that each of these provides income back to you and/or your spouse or children for a lifetime or lifetimes, or for a term of years, with the remainder going to the charity. Even though the charity does not actually receive the contribution until the end of the trust, the donor is able to obtain a current deduction for the value of the remainder interest, as these are irrevocable trusts.

A similar device is the charitable lead trust. This gives the income to the charity for a term of years and the remainder to designated beneficiaries, again with a current deduction available for the value of the donation to the charity. In today’s economic environment, this is actually a very beneficial tool.

Of course, you may also make a contribution through your will or revocable trust. However, this type of a contribution is revocable; any charitable deduction will have to wait until the contribution is actually made by your estate to the nonprofit organization.

Again, unrestricted current gifts are most beneficial to the organization, but any of these methods of contributing will be appreciated by the organization of your choice.

Congratulations on your decision to help.

Charitable Opportunities through the ABA Fund for Justice and Education

For 50 years, the ABA Fund for Justice and Education has helped strengthen the American Bar Association’s ability to develop programs that provide lawyers with the resources needed to improve the justice system, improve their legal skills, and improve our communities.

As the 501(c)(3) charitable fund of the American Bar Association, the ABA Fund for Justice and Education supports more than 200 ABA public service and educational program each year that promote:

  • Access to Justice
  • Children and Family Rights
  • Public Education
  • International Justice
  • Professionalism and the Legal Profession

The programs below provide a snapshot of what the ABA and its members are doing to provide crucial legal services to our most vulnerable populations.

ABA Solo, Small Firm and General Practice Division
In the past five years, tuition and fees at public universities have risen by 57 percent, causing students to take on more student loan debt than any other generation. In light of these realities, financial literacy is becoming an increasingly important part of a young person’s survival kit.
That is why ABA member Karen A. Overstreet, a U.S. Bankruptcy Court judge, helped organize a financial literacy project—distinctively titled Debt-Slapped—for high school students at Seattle School District’s Middle College Program.
The program recruits local attorneys and law students to teach an hour-long course to students. The ABA Solo, Small Firm and General Practice Division is working to expand the scope of Debt-Slapped and bring it to other cities across the country.
ABA Legal Opportunity Scholarship Fund
In the middle of her senior year, Jennifer Rodriguez turned 18 and became a legal adult. After six years in foster care, Jennifer was forced to leave her group home and face the world with no money, no high school diploma, and only three garbage bags containing all her worldly possessions.
Jennifer was determined not to become a statistic. Instead, she became one of the first 280 students to receive the ABA Legal Opportunity Scholarship. Each year, the ABA Legal Opportunity Scholarship Fund provides 20 diverse students with $15,000 in aid to atttend law school.
Today, Jennifer is the executive director of the Youth Law Center in San Francisco, where she is using her legal expertise to help ensure children in foster care have the precious childhood they deserve.
ABA Commission on Homelessness and Poverty
Mark Strickland is just one of an estimated 3.5 million U.S. citizens who experience homelessness each year. Caught up in the daily struggle for food, clothing, and shelter, homeless people such as Mark often find themselves facing citations for illegal lodging and jaywalking.
The ABA Commission on Homelessness and Poverty has helped create or enhance more than 50 homeless courts set in local homeless shelters across the country, providing a non-threatening environment for homeless individuals to address minor legal issues. Participants such as Mark receive counseling, substance abuse treatment, or job training, instead of facing fines or incarceration.
Since 2001 the Commission has also provided technical assistance to more than 100 communities across the nation and abroad interested in replicating homeless courts in their area.

Discover how you can help inspire change by learning more about the charitable opportunities available through the ABA Fund for Justice and Education.

Change starts small. Change starts with you.

americanbar.org/fje

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