Introduction
As an investor, you know the value of your portfolio depends on a comprehensive strategy that integrates all your financial goals, from producing income to asset building to protecting your holdings from taxes, ultimately building a legacy.

Charitable gifts can be a valuable component of your overall tax and estate plan. Tax considerations are critical in order to maximize philanthropic benefits, both to the groups you support as well as to take advantage of the charitable tax deduction. For a higher-income individual with multiple investments, the charitable giving and tax-saving opportunities are even greater, since the charitable tax benefits are directly related to the contributor’s tax rate.

An individual in the 35% tax bracket, for example, essentially keeps just $650 of every $1,000 earned. But by giving $1,000 to charity, this individual removes that money from the taxable base by receiving a deduction for the full value of the gift.

The information contained in this article is offered for information and education only. It is not intended and should not be construed as a recommendation or as legal, tax, or investment advice or a legal opinion. You should discuss all charitable and tax issues with your tax and/or financial advisor to determine the best course of action for your specific situation prior to taking any action based upon the information contained in this article.

Benefits of giving go beyond tax savings
In addition to helping donors reduce their tax burdens, charitable contributions are critical to nonprofit organizations. Your gifts will enable your favorite organizations to continue and expand their programs. The tax benefits you get for being a part of the charity’s good work is a bonus.

And with a well thought out, comprehensive giving and tax plan, you can come to fully appreciate the words of Winston Churchill: We make a living by what we get, but we make a life by what we give.

Below you will find information that may benefit you as you plan your yearly taxes and your legacy through your estate.

Understanding IRS limits on charitable gifts

Organizations qualifying as tax-exempt
Income limits on donations
Limits based on the type of gift donated
Claiming limited deductions in future tax years
Summary of applying the carryforward to excess contributions
Total deductions reduced for high-income earners

U.S. tax laws generally reward individuals for their goodwill. In most cases, a donation to a qualified charity is deductible as an itemized deduction in the tax year in which it is given. This applies to donations regardless of whether you give directly to the charity or contribute to a donor-advised fund or other structured giving program.

Donations can be cash (which the tax code defines as gifts made by check or credit card), real property, goods, or assets. To get the tax benefit of any charitable gifts, you must itemize your donations as deductions on Form 1040, Schedule A.

However, tax laws and regulations could limit the deductibility of charitable gifts based on several factors, including the donor’s income, the type of gift made, and the type of organization to which the gift is made.

Organizations qualifying as tax-exempt
The IRS strictly regulates the tax-exempt status of charitable groups. Those that meet the agency’s approval are known as qualified organizations, and only deductions to such qualified organizations are deductible.

Generally, tax-exempt organizations must file an annual information return with the Internal Revenue Service that details the group’s income, expenses, and activities. There are some filing exceptions: Churches, certain religious organizations, and certain organizations affiliated with state and local governments do not need to file. Organizations with annual gross receipts of $25,000 or less were not required to file until the tax year ended on or after December 31, 2007.

The T. Rowe Price Program for Charitable Giving’s charity search (at www.ProgramForGiving.org) can help you determine if a charity is qualified. The site provides profiles of charitable organizations, financial information, and tells you whether the organization has filed a Form 990. The IRS Publication 78, published quarterly, lists all qualifying organizations. Keep in mind that if you want to give to your local church or religious organization, it might not be in the search registry because it is not required to file with the IRS.

Once you determine that a group is IRS-qualified, then you must ensure that both you and the organization are able under tax laws to take full advantage of a gift.

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Income limits on donations
The nature of the institution to which you contribute is the first condition that may limit your deduction. You are also limited to certain percentages of your adjusted gross income.

In most cases, your gift’s deductibility is restricted to 50% of your adjusted gross income (AGI). That is, you cannot give these groups an amount that is more than half of your adjusted gross income. In some instances, stricter limits—30% and 20% of AGI—apply.

The groups for which you can get a full tax benefit for donating an amount up to half of your annual income are known as 50% limit organizations. This category includes educational organizations, hospitals and medical research organizations, government units, and churches.

Qualified organizations, gifts to which are limited to 30% of AGI, include veterans organizations, fraternal societies, and certain private family foundations. A reputable and IRS-qualified charity will be able to tell you its limitation category.

Here’s an example of how the limits could affect your giving:

A single taxpayer has an adjusted gross income of approximately $60,000. He may deduct as a charitable donation to his alma mater roughly $30,000, or 50% of his AGI. He also elects to give to his chapter of the Rotary Club; since this is a 30% limit organization, he is limited to approximately $18,000 ($60,000 x 30%). He ultimately contributes $5,000 in cash to each organization and is able to take the full amounts as charitable deductions on his tax return.

Another example:

Similar situation, however the taxpayer decides to donate $10,000 to his alma mater and $20,000 to the Rotary Club. Since the deduction for the contribution to the Rotary Club is limited to $18,000, the taxpayer can only deduct that much on his tax return this year. He may then carryforward the $2,000 excess to the subsequent tax year. As an alternative, he may decide to donate $12,000 to his alma mater and $18,000 to the Rotary Club to receive the full $30,000 deduction this year.

If your contributions are subject to more than one limitation, you deduct contributions to 50% limit organizations first, followed by contributions subject to the 30% limit, and then contributions subject to the 20% limit.

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Limits based on the type of gift donated
The nature of the donated assets also could further limit a gift’s tax deductibility.

Contributions of long-term capital gain property to 50% limit institutions are subject to a 30% of AGI limitation. (Contributions of cash and short-term capital gain property to these groups remain subject to the 50% AGI limitation. For short-term capital gain property, you can only deduct the original cost of the property, rather than its appreciated value like you can with long-term capital gain property.)

With regard to 30% institutions, contributions of long-term capital gain property are subject to a 20% of AGI limitation. (Cash and short-term capital gain property donations remain subject to the 30% limit.)

Depending on your personal tax situation, donation of a long-term appreciated asset could help significantly reduce your tax liability.

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Claiming limited deductions in future tax years
If your charitable deduction exceeds the limit allowed by the IRS in a particular year, you can claim the excess amount on subsequent tax returns, with some limitations.

First, in carrying forward your excess contributions, you must take into account your income in the year in which you want to claim the carryforward. Your total contributions deduction for the year to which you carryforward past amounts cannot exceed 50% of your adjusted gross income for that year. In addition, carryforward contributions are subject to the same percentage limits in the year to which they are carried. That means contributions subject to the 20% limit in the year they were originally made remain subject to the 20% limit in the year to which they are carried.

Also, you will want to take into account the timing of the claim. For each category of contributions, you must deduct carryover contributions only after deducting all allowable contributions in that category for the current year.

Finally, you have only five years to make use of your excess contributions. Any amount you cannot claim during that time is lost.

This example looks at how one couple claimed excess carryforward deductions:

A married couple, filing jointly, has an adjusted gross income of approximately $84,000. The couple made a contribution of appreciated securities valued at $46,200 to the local hospital for the addition of a special cancer research wing. The hospital qualifies as a 50% institution and the donated property is long-term capital gain property subject to a 30% of AGI limitation, or $25,200 (i.e., $84,000 x 30%). The couple, therefore, can deduct only $25,200 for the current calendar year and may carryforward the remaining $21,000 ($46,200 — $25,200) to the following year. If the couple’s AGI drops to $60,000 in the following year, they can deduct $18,000 of the $21,000 then and carryforward the remaining $3,000 deductible amount to year three.

Summary of applying the carryforward to excess contributions

Any excess over the AGI limitation is carried forward to the subsequent year. If your contributions are subject to more than one limitation, you deduct contributions to 50% limit organizations first, followed by contributions to 30% limit organizations, then contributions subject to the 20% limit.

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Total deductions reduced for high-income earners
If your income exceeds a certain level, you might face another possible tax deduction restriction.

Your overall itemized deductions, including charitable contributions, may be reduced based on your AGI. The phaseout kicks in for 2008 filings when your AGI exceeds $159,950. This threshold applies both to single filers as well as to couples filing joint returns; the AGI cap for a married taxpayer filing a separate return is $79,975.

The reduction of itemized deductions is 3%. However, as part of the Bush administration tax cuts passed in 2001 and adjusted since, the reduction percentage is being phased out. In 2008 and 2009, the 3% reduction of itemized deductions will be only 1%.

This example looks at how a couple might lose some 2008 itemized deductions:

A married couple filing jointly has an adjusted gross income of $250,000 in 2008. Their itemized deductions consist of $10,000 for charitable contributions and $12,000 for state income and property taxes. Because their AGI exceeds the threshold of $159,950, their total itemized deductions for the year will be reduced by 1%, or $901 ($250,000 - $159,950 = $90,050 x 1% = $901). The total amount they may deduct on their tax return is $21,099 ($22,000 in itemized deductions minus $901).

The limit on itemized deductions itself will be eliminated in 2010. However, unless Congress takes further action before then, taxpayers who make over the threshold amounts will see the limitation return in full force as a 3% reduction of up to 80% of itemized deductions, in 2011.

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Donating appreciated assets

Avoiding capital gains via long-term appreciated gifts
Treatment of capital gains via short-term appreciated gifts
Taking tax advantage of depreciated assets

Many individuals find they can recognize substantial tax benefits by donating long-term appreciated property to charity.

Take, for example, an individual who wished to make a gift of $12,000 in long-term (held more than one year) appreciated securities to a favorite environmental charity. The shareholder purchased the shares for $2,000 in 1990 and they have since appreciated in value $10,000. The shareholder decides to donate the securities because, although they have increased in value over the years, they no longer fit into the shareholder’s overall investment plan and perhaps have even lost a bit of value recently.

Avoiding capital gains via long-term appreciated gifts
Because the shares are going to a qualified organization, the donor will not realize any capital gains at the time of the gift, thereby avoiding payment of capital gains taxes on the appreciation of these securities. Plus, the value of the donation is the fair market value of the securities on the date of the gift, which is deductible from the donor’s federal income taxes (up to the IRS limits).

Action Idea: You may wish to consider giving other than cash. Property, especially appreciated assets, could be a welcome gift to a charity and produce a valuable tax break for you.

If the shareholder had instead sold the shares before giving them to the environmental group, he would have faced capital gains taxes of up to $1,500 (i.e., 15% of $10,000) and the net proceeds available to give to charity would be less. Both the donor and the recipient charity would not have received the maximum benefits—a smaller charitable income tax deduction for the donor and a smaller contribution received by the organization.

However, as noted in the discussion of IRS donation limits, there are limits on such gifts of appreciated property. Contributions of long-term capital gain property to 50% limit institutions are limited to 30% of AGI. Similar contributions to 30% institutions are limited to 20%.

Treatment of capital gains via short-term appreciated gifts
Contributions of cash and short-term capital gain property remain subject to the 50% AGI limitation. For short-term capital gain property, you can only deduct the original cost of the stock—rather than its appreciated value like you can with long-term capital gain property.

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Taking tax advantage of depreciated assets
Your depreciated securities also may be able to provide tax benefits to you and a charity. Gaining the maximum benefit, however, requires more than simply signing over the asset to the charity.

If you donate the security, your deduction is limited to the asset’s current market value. For a stock purchased for $10,000 which is now worth half that, your deduction is the current value of $5,000 if you are making the gift now.

Action Idea: You may wish to investigate selling depreciated assets and contributing the proceeds so that the loss can be used to reduce your taxes.

If you sell the security, you can use the loss to offset any capital gains you might have realized during the tax year or up to $3,000 of ordinary income. Then donate the cash from the sale to the charity, thereby getting a charitable tax deduction for the cash gift.

In the case of real property, when you donate an asset that has lost value during your ownership, your deduction is limited to the lower of the asset’s current market value or its net cost basis, i.e., cost less depreciation. If the property is fully depreciated, you get no tax deduction.

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Making charitable gifts from retirement vehicles

Tax-free IRA distributions for charitable purposes
Using donations to reduce taxes on retirement money
Donating Roth IRA money
Donating appreciated company stock in a retirement plan
Addressing the tax concerns of heirs
Naming a charitable organization as beneficiary

Retirement savings options have changed dramatically since individual retirement accounts (IRAs) were created more than 30 years ago. For many individuals, IRAs and similar vehicles such as 401(k), 403(b), and Keogh plans remain popular ways to help prepare for a comfortable post-career lifestyle by postponing tax payments on earnings while you work. They also can be a valuable part of a charitable giving program.

For such plans, you will face tax costs when you eventually start taking distributions, in many cases as required minimum distributions (RMDs) at age 70½. Depending on your tax situation, you could face a sizeable tax bill because distributions from these accounts are taxed as ordinary income, possibly at a rate as high as 35%.

Tax-free IRA distributions for charitable purposes
As part of the Emergency Economic Stabilization Act of 2008, signed into law on October 3, 2008, the option for individuals older than age 70½ to directly roll funds from an IRA to a qualified charity was extended. Known as the charitable transfer, this donation and tax strategy first appeared in 2006, but expired at the end of 2007. The new law continues this option through 2009.
 
Eligible IRA holders can continue to directly transfer from their retirement accounts up to $100,000 that otherwise would be taxable income. This move is most beneficial to older traditional IRA account holders, who must take at least required minimum distributions. By transferring those required withdrawals to a charity, they saved on taxes because much of the money in such accounts is eventually taxable at ordinary income tax rates, which could be as high as 35%.
 
Making charitable donations directly from your IRA also could be used by Roth IRA account holders. For these individuals, such a transfer would be worthwhile if the Roth had income that would have faced tax when distributed (e.g., the account was not held the requisite five years to allow tax-free withdrawals of earnings).
 
Such rollover gifts, however, cannot be directed to foundations, donor-advised funds, or supporting organizations.
 
Neither are such transfer gifts deductible by the donor. Since this distribution is tax-free, you cannot deduct the gift. But the ability to keep the money out of your taxable income can offset this deduction loss.

Using donations to reduce taxes on retirement money
If you are younger than age 70½, you'll be receiving the money from your tax-deferred retirement savings as ordinary income, consider a giving plan that helps reduce the taxes on those distributions.

As with any other income, you can reduce the taxable amount of your retirement income by claiming deductions. If your tax situation is such that it is beneficial to you to itemize deductions, then donations you make to qualified organizations will increase your deductions and should reduce your tax bill.

Just be sure that you keep in mind the various limitations on deductions, especially those that relate to a donor’s adjusted gross income.

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Donating Roth IRA money
The situation is different if your retirement money is in a Roth IRA. You are not required to take RMDs from a Roth and the total amount of your withdrawals (under most circumstances) will be income tax-free.

If your Roth distributions are your only income, then you probably have no tax bill. But if, in addition to your Roth funds, you have other income that is taxable, you might want to consider donating Roth distributions to a charity as a way to reduce taxes on your other taxable retirement income. No income taxes will be due and you may claim the entire amount of the transfer as a charitable income tax deduction, subject to IRS limitations.

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Donating appreciated company stock in a retirement plan
When a company establishes a retirement plan for its employees, it must meet IRS guidelines; in doing so, it becomes a qualified plan. For you, the most important aspect of a qualified plan is its tax-deferral feature: taxes are typically due on contributions and their earnings only when withdrawn.

Some qualified company plans allow employees to purchase company stock to add to their retirement accounts. If you have such securities that have appreciated while in the plan, you might be able to take advantage of this special tax arrangement and donate the stock to a charity.

This is allowable as long as you (or your beneficiaries) are eligible to take a lump-sum distribution (as defined by the IRS) of the account within a single tax year. This lump-sum distribution can only be taken without penalty once you reach age 59½ unless due to a “qualifying event,” such as becoming disabled, retiring, or leaving the job—either voluntarily or otherwise.

You or your beneficiaries may elect to use a tax-advantaged net unrealized appreciation (NUA) strategy upon lump-sum distribution of an account that contains appreciated securities. Your NUA is the difference in the appreciated value of the company stock in excess of what you paid for it. You must pay income tax on the cost basis of your stock at your ordinary tax rates upon distribution (an additional 10% penalty will apply if you are under age 59½) and the NUA will be taxed at the long-term capital gains rate (currently a maximum of 15%) when the stock is sold.

Caution: If you or your surviving spouse chooses to roll over some or all of the stock into a Traditional IRA, when the stock is distributed from the IRA it will be taxed at ordinary income tax rates based on the market value at distribution.

After you have withdrawn your appreciated stock from the plan (and paid taxes on the cost basis), you could donate some or all of your appreciated stock to charity. By doing this, you will receive a charitable income tax deduction equal to the fair market value of the stock and will not recognize any long-term taxable gain at the time you donate the shares.

This example illustrates how this process works:

An individual receives a lump-sum distribution of 1,000 shares of employer stock from a 401(k) plan with a cost basis of $4 per share. The current market value is $10 per share. The stock has appreciation of $6,000. The recipient can elect to have this treated as NUA and then donate this stock to charity. The charitable donation deduction for the year would be $10,000 and the recipient would not have to pay tax on the stock’s appreciation.

This special tax treatment is not applicable to appreciated stock in a Traditional IRA account. All pretax contributions and investment earnings in such an account are subject to ordinary income taxes when distributed, as discussed earlier.

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Addressing the tax concerns of heirs
When it comes to retirement accounts, the tax concerns surrounding the money do not necessarily end when you pass away.

Retirement account money left to anyone other than your spouse is known as income in respect of the decedent (IRD). The IRS defines this as all income that the account holder would have eventually received had death not occurred. It includes retirement account balances at the time of death, including unrealized appreciation and income accrued to date of death, minus any nondeductible contributions. (Some people put money into a Traditional IRA even when they cannot deduct the contributions. This generally occurs when you have a retirement account at work but also contribute to a Traditional IRA. In this case, you cannot deduct your IRA contributions if you earned over a certain threshold amount.)

Your spouse can escape IRD complications by rolling over an inherited lump-sum company retirement account or IRA into another Traditional IRA. But if the account beneficiary is someone else, some or all of the lump-sum distribution from the inherited account may be taxable, both at the federal and state levels. Even with recent changes in federal estate tax laws (which could change again in coming years), the combined taxes could be quite onerous.

Action Idea: So your heirs won’t face taxes on your retirement fund, you may wish to consider leaving other assets to them and bequeathing your IRA to a charitable organization.

To avoid such tax problems, you might want to consider leaving other assets (for example, stocks that will transfer with a stepped-up basis) to your heirs and bequeathing your retirement account balance to a charity or a donor-advised fund that will ultimately distribute your excess retirement money to a qualified organization.

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Naming a charitable organization as beneficiary
The advantage of leaving a retirement fund to a charity is that your estate will receive an estate tax charitable deduction for the amount donated. And the charity, which does not have to pay taxes, will have full use of your retirement account proceeds.

It is usually easy to leave the balance of a retirement account to a qualified charity. The charity to which you want to leave the money should have information and documents to start the process. You’ll also need to advise your plan administrator and complete the appropriate paperwork required by the financial institution holding your retirement account. Depending upon which kind of retirement account you have, you’ll also need to check on any rights your spouse might have to your plan. In most cases, he or she will have to give written approval for you to name someone else as beneficiary.

In addition to getting your spouse’s approval, be sure to talk with the rest of your family so that everyone knows, and is comfortable with, your retirement account bequest wishes.

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Exploring the role of trusts

An overview of trusts
Charitable remainder trust
Charitable lead trust

Many people shy away from considering trusts when it comes to their personal financial planning. The word tends to conjure visions of complex paperwork, hours in a lawyer’s office, and ultra-wealthy clients pondering ways to shield their massive wealth.

Trust arrangements, however, are not just for the very wealthy. Regardless of net worth, a trust can play a valuable role in estate planning. And the correct one for your personal situation can help provide for you, your family, or, if you choose, a charitable cause.

An overview of trusts
A trust is a legal agreement in which you, as the creator (or grantor) of the trust, assign control of your property and assets to a trustee (who can also be yourself to retain control) that manages them for the trust’s beneficiaries. Trusts are also used as a way to bypass probate, the sometimes lengthy legal process where a court assesses your final property and determines the validity of your will.

A trust can take one of two forms: revocable, which means you can change the arrangement’s terms later, or irrevocable, which means you cannot.

As personal financial planning and estate planning needs have grown, so have the variety of trusts: inter vivos or living, testamentary, A-B, QTIP, legacy, dynasty, and various charitable trust options. Some arrangements are known as split-interest trusts, which provide tax benefits to the trust grantor and make distributions to both charitable and noncharitable beneficiaries.

Action Idea: In choosing a trust, decide who you want to receive income distributions first—your noncharitable beneficiaries or a qualified charitable organization.

Tax laws differentiate split-interest trusts depending upon how and when the trust makes distributions. The two most common grantor-established trusts are:

1. Charitable remainder trust—This trust pays a fixed dollar amount or a percentage of its assets annually to one or more noncharitable beneficiaries. These payments may be for a specified number of years or for the life of the beneficiary. When the payments end, the remaining interest is transferred to one or more charitable organizations.
2. Charitable lead trust—This trust makes a series of payments—fixed dollar amount or percentage of assets—to a charitable beneficiary for a period, after which the remaining assets are transferred to a noncharitable beneficiary.

Keep in mind: The payments noted are made directly to the charitable beneficiary. This option is most appropriate for individuals with large estates who do not plan to rely on the earnings of these assets for income.

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Charitable remainder trust
The charitable remainder trust (CRT) has become quite popular over the last few years. The IRS reports that the number of tax returns filed by these entities showed a marked increase, especially in the 1990s when the stock market experienced unprecedented growth. In an effort to shelter their earnings from taxes, many investors turned to CRTs.

Basically, you place your assets in a CRT and the trustee sells them to create an investment fund that pays you income for a designated period of time. How the payment is made depends on the trust’s structure. It can be either a charitable remainder annuity trust or a charitable remainder unitrust.

An annuity trust pays its noncharitable beneficiaries a fixed amount each year determined when the trust is established. The payment amount is based on the value of the assets initially placed in the trust. A unitrust arrangement distributes a percentage of its assets’ fair market value to its noncharitable beneficiaries each year.

In both cases, when the trust terminates, remaining assets go to the selected charitable beneficiary.

In establishing a CRT, you transfer assets irrevocably into the trust and name your beneficiaries, who then may receive payments either over their lifetime (if individuals) or for a period not to exceed 20 years. When the payment period ends, the remaining assets go to your chosen charitable organization.

Charitable remainder trusts offer several tax benefits:

• You get a tax deduction when you establish the trust. If the gift is large enough to exceed donation limits, you can carry the additional amount forward for tax deductions in the next five years as discussed earlier in the IRS limitations section.
• When appreciated assets are donated to the trust, you can defer paying taxes on the unrealized capital gains until the trust sells the asset.
• At death, your estate may be eligible for a charitable deduction.

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Charitable lead trust
A charitable lead trust (CLT) is basically the reverse of a CRT. Distributions go first to a charitable beneficiary, with the remaining assets at the end of a specific term then going to your other beneficiaries.

Keep in mind: This option is most appropriate for individuals with large estates who do not plan to rely on the earnings of these assets for income.

Action Idea: Charitable lead trusts are usually more tax advantageous for your family if you have gift, generation skipping, or estate tax concerns.

Which charitable trust you choose depends upon your current personal financial needs, those of your family now as well as after you are gone, and what kind of benefits you want to provide to your favorite charity.

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Determining whether to invest in charitable annuities

General annuity attributes
Charitable annuity benefits

An annuity is an investment vehicle that typically includes an insurance component. Because of this, annuities used to be sold only by insurance companies. However, in today’s diverse financial marketplace you can purchase annuities through other channels, such as stockbrokers, financial institutions, and mutual fund companies. Annuities also are available via some employer-provided retirement plans.

Annuities generally appeal to investors looking for a less volatile investment option, since the product makes a series of regular payments to the owner. This ongoing income stream can be a nice addition to other retirement income.

Annuities also can be established to provide income not only to you and your heirs, but also to benefit a charitable organization. In such cases, you likely will get more of a tax benefit than with a noncharitable annuity arrangement.

General annuity attributes
Annuities basically come in either fixed or variable forms.

As its name indicates, a fixed annuity earns a guaranteed rate of return for a set time. To make these regular payouts, the annuity is usually invested in government bonds and other low-risk securities. This is analogous to certificates of deposit (CD). However, unlike a CD, an annuity is not guaranteed by the FDIC; rather, its value is related to the financial stability of the insurance company that issued it.

Variable rate annuities, on the other hand, are more risky. As with standard equity investments, a variable annuity is invested in other earning vehicles and your payout depends on the ultimate performance of that portfolio.

Annuities also are divided into two payout categories: immediate versus deferred income. If you’re looking for maximum security, you’ll likely opt for a fixed-rate, immediate payout; if you don’t need the money immediately and want to give it a chance to produce more, a variable rate annuity that defers income will probably be your choice.

Deferred annuities also offer the advantage of not being taxed until distributions are made, either by withdrawal or distributed as payments. The taxable portion of distributions, however, is treated as ordinary income. This could make them less appealing than investments other than annuities that pay dividends or capital gains, which are taxed at a lower rate (15%) than ordinary income (with rates as high as 35%).

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Charitable annuity benefits
When taxes are of particular concern, a charitable gift annuity might make sense.

A gift annuity is an irrevocable contract between you and a qualified organization that has such a giving program in place. In most cases you can use cash or transfer other assets to the annuity in exchange for guaranteed lifelong payments. At the time of death, the payments cease and the charity retains the assets for their benefit. As with regular annuities, you determine whether you want to receive payouts immediately or defer distributions.

By creating a charitable gift annuity, not only does the qualified organization get the investment’s benefits, but you are entitled to a tax deduction when it is purchased. In the year the annuity is purchased, you can take a tax deduction for the excess of the amount of cash or value of property transferred to the charitable organization over the fair market value of the annuity. When you purchase the annuity with cash, it is a 50% limit deduction. If you fund it with long-term capital gain assets, a 30% limit deduction is allowed, but even with the lower limit, using securities to fund the annuity might be advisable since a portion of your unrealized gains avoid tax and taxes on the remaining gains are deferred until annuity payments are made. If you find that a charitable gift annuity fits into your overall giving and tax plan, check with the charity to which you wish to donate. Qualified organizations typically offer various types of charitable annuities from which to choose.

Action Idea: If you don’t need immediate income, you may wish to consider a deferred charitable annuity.

For example, rather than taking payouts immediately, you might find deferred annuity payments preferable. Here you decide when in the future you want to start the distributions. This option tends to appeal to younger donors who do not need the current income stream.

Also look into a joint gift annuity that could let you simultaneously provide for someone else, such as your spouse or a child. This co-beneficiary will share the annuity’s payments with you. When either of you passes away, the payments continue to the survivor.

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Establishing a formal planned giving program
Donor-advised funds versus private foundations

Time, tax, and money matters
Comparing donor-advised funds with private foundations
Converting a foundation to a donor-advised fund

Now that you have attained the financial security where you are able to share your assets philanthropically, your biggest decision is determining just how to do that.

As discussed earlier, there are many ways to donate to qualified organizations. But when a more systematic, managed approach is desired, most people look closely at two options: a donor-advised fund or a private foundation.

How do you know which is best for you? Obviously, you must look at your overall portfolio and how much you want to dedicate to charitable causes. There are also lifestyle issues (how involved do you want to be in the giving process), management concerns (again, what level of involvement you seek), and of course tax considerations.

Before making a decision, examine what distinguishes each philanthropic program.

Time, tax, and money matters
In many respects, donor-advised funds and private foundations are similar. Both offer you a systematic, managed way to give to your favorite charities. But there are some important differences.

Private foundations allow you, as donor, and in many instances your family, as members of the foundation's Board of Directors, more direct control in determining investments and charitable gifts. But this control also requires a substantial time commitment. And under IRS rules, you are required to give away minimum amounts each year: at least 5% of net investment assets.

In a donor-advised fund, you do not have the same level of oversight. Rather, there is a review and approval process involved in determining where charitable gifts go and how assets are invested. You (and your family members if you wish) do serve as donor-advisor and make recommendations on investments and grants awarded through a donor-advised fund account. But the decisions fall ultimately to the fund’s Board of Directors.

Neither do a donor-advised fund’s assets have to be distributed as regularly as in a foundation. The IRS requires that at least 5% of the fund’s average net assets be dispersed to qualified charities on a rolling five-year basis. This allows you to be selective in your grant recommendations and gives your investments additional time to grow.

Tax ramifications differ, too. Most foundations face an annual excise tax of 2%; no similar tax is assessed with a donor-advised fund.

Donor-advised funds also provide larger tax benefits. Your deductions for cash gifts to a private foundation are limited to 30% of your AGI, 20% for any donated long-term appreciated securities. However, as a donor to a donor-advised fund, you can deduct cash gifts up to 50% of your AGI, 30% when the donations are appreciated assets.

More details on these and other differences between a donor-advised fund and a private foundation can be found below in the side-by-side comparison of the two programs.

Comparing donor-advised funds with private foundations
Donor-advised funds and private foundations are similar in many respects. Each offers you a managed, tax-effective way to support your favorite charitable causes.

But there are some important differences. The table below compares the donor-advised funds with foundations to help you determine which method better fulfills your philanthropic wishes.

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Converting a foundation to a donor-advised fund
If you already have a private foundation and decide that you prefer a donor-advised fund, you can make the change.

You can convert your foundation to public charity status or transfer the foundation’s assets to a public charity. Since many donor-advised funds are classified as a public charity by the IRS, you can make the conversion by transferring all of your foundation assets to the donor-advised fund.

An additional IRS caveat to heed: If the recipient charity has been in continuous existence for less than five years immediately preceding the foundation’s termination distribution, there may be additional steps required to complete the termination.

It’s important that you review the procedures with your legal counsel since if the appropriate steps are not taken, the foundation could be assessed a sizeable termination tax. This assessment is the lesser of 1) the aggregate tax benefit resulting from the foundation's tax-exempt status or 2) the total value of the foundation’s net assets.

The donor-advised fund to which you plan to transfer your foundation funds will provide you with the necessary transfer paperwork. Also be sure to check whether your state requires you to take additional steps to terminate the foundation.

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How the alternative minimum tax affects philanthropy

Charitable gifts escape AMT restrictions

Much attention has been focused lately on the alternative minimum tax (AMT). This parallel tax system was created in 1969 to ensure that wealthy taxpayers (defined at that time as those with income over $200,000) didn’t use loopholes to escape paying taxes. The AMT has its own set of rates and requires you to complete a separate set of computations.

While AMT rates themselves aren’t very high—26% and 28%—if you find you are subject to the tax you could face a substantial bill. The reason: the AMT disallows many common regular tax deductions and credits. When calculating your potential AMT liability, you must add back or reduce these tax breaks and this gives you a higher income level that’s then subject to the AMT rates.

If your calculation of your regular tax bill is as much (or more) than the alternative tax, you escape the AMT. But if your regular tax falls below the AMT amount, you have to make up the difference.

Charitable gifts escape AMT restrictions
Fortunately, one of the few deductions still allowed under the AMT is charitable donations. Even if you are subject to the AMT, your charitable contributions will continue to reduce your tax liability.

Action Idea: Depending on your individual circumstances, you might be able to shift into another tax year some income and deductions that otherwise would force you into the AMT.

From a tax planning standpoint, if you expect to be subject to the AMT in the current tax year but you are generally in a marginal income tax bracket that is higher than the top 28% AMT rate (levied on income that is $175,000 above the exemption amount, $87,500 for married filing separately—the 26% rate applies to income above the exemption amount, but less than $175,000), you may want to consider postponing large charitable contributions to a year when you are not subject to the AMT. In a non-AMT tax year, your charitable income tax deduction will reduce your tax liability by more than in a year when you are subject to the AMT.

If, however, you expect to be subject to the AMT on a yearly basis, or you know that a charity you want to support needs to receive your donation this year to achieve its goals, you may want to take your charitable contributions as deductions this year, which will reduce your AMT liability, nevertheless.

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Legislative outlook

Charities and charitable giving: proposals for reform
Repealing the estate tax
Abolishing the AMT
Comprehensive tax reform
Increasing standard mileage rate for charitable travel

While charitable contributors are usually motivated by their personal desire to help others, the tax benefits of philanthropic actions cannot be ignored. Neither can the actions of members of Congress, who change the existing tax benefits available to charities and their donors.

Here's a look at issues affecting charitable giving that are likely to be considered on Capitol Hill.

Charities and charitable giving: proposals for reform
The federal deficit continues to be worrisome, both to the taxpaying public and to federal lawmakers. While federal spending is a major contributor, especially in light of the financial sector rescue programs approved this fall, Congress also remains committed to reducing the tax gap, i.e., the amount of tax collected versus the amount that the IRS believes should be paid.

To reduce the gap, expect Congress to continue examining ways to increase taxpayer compliance and the role of charities. Groundwork was laid during earlier Congressional sessions when the Senate Finance Committee heard recommendations on ways to strengthen the role of U.S. charities. The Program for Charitable Giving has always complied with legislative and tax requirements and supports efforts to ensure that all charitable organizations fulfill their intended purposes.

Much of the Senate panel's work in this regard was incorporated into the Pension Protection Act of 2006, H.R.4, which was signed into law by President Bush on August 17, 2006. This law clarified restrictions on and imposed new accountability measures for donor-advised funds. The T. Rowe Price Program for Charitable Giving conforms to these requirements, and the changes had no material effect on how the Program operates.

In the 2008 election year, the Internal Revenue Service and Congress shifted much of their focus to the involvement of nonprofits, especially churches, in political activities. The IRS updated its Publication 1828, Tax Guide for Churches and Religious Organizations, to ensure that such groups know and follow the no-politicking rules. Failure to do so could result in a 501(c)(3) organization losing its tax-exempt status.

Action Idea: If you have questions about an organization's tax-exempt status, check the online version of Publication 78, as well as the Website, www.IRS.gov, for the latest information on the group.

As previously mentioned, the ability of some IRA holders age 70½ to roll funds directly to qualified charities has been extended through 2009. Such rollover gifts cannot be directed to foundations, donor-advised funds (such as the Program for Charitable Giving), or supporting organizations. While there has been some discussion by lawmakers to lift the limits on the size and kind of contributions these rollovers could fund, that is not likely to happen this legislative year.

Individual taxpayers continue to face stricter charitable giving guidelines, including higher standards for the condition of donated clothing and household goods. The IRS now allows deductions on only those items that are in "good" shape or better when given to a qualified organization.

Tighter bookkeeping standards also still apply to monetary gifts. Donors now must obtain a receipt or be able to provide official substantiation, such as a bank statement, canceled check, or credit card bill, to verify the gift regardless of the amount. Previously, such documentation was required only for gifts of $250 or more.

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Repealing the estate tax
Taxation of estates will disappear in 2010, but will return the following year at a substantially higher tax rate (55%) for estates worth $1 million or more. Given this impending deadline, Congress has tried repeatedly—and unsuccessfully—to revise this tax.

With the current makeup of the Congress, estate tax opponents are unlikely to achieve permanent repeal of this levy. There is some wider support, however, to increase the exemption amount (discussions have covered a spectrum of estates ranging from $3.5 million to $10 million) and perhaps make that level permanent.

The tax's effects on charities will continue to be part of the debate. Estate tax supporters argue that the levy is responsible for annual donations of a substantial amount of money in the form of charitable bequests. In an analysis for The Center for Philanthropy and Indiana University, Dean Regenovich, development officer for Indiana University in the Office of the Vice President for Information Technology, writes:

"Bequests are the backbone of all planned giving programs and historically are the most popular planned giving method used by donors. Donors like bequests because they are easy to understand and do not require the donor to part with assets during life. This provides the donor peace of mind knowing that assets are available to satisfy unforeseen expenses such as medical or nursing home costs. Charities like bequests because they are easy to explain, require very little cost to promote, and once in place are rarely revoked."

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Abolishing the AMT
Congress will continue to grapple with how to ease the pinch that a growing number of middle-class taxpayers are feeling from the alternative minimum tax (AMT).

Before adjourning, the 110^th Congress enacted yet again another temporary AMT relief bill that should keep an estimated 21 million individuals off the parallel tax system's rolls for the 2009 filing season.

Even with the passage of a so-called AMT patch, however, the core problems of the tax will continue to bedevil Congress.

Lawmakers, taxpayer groups, and even some of the IRS's own employees have called for changes or outright elimination of this parallel tax system, which is not indexed for inflation. The AMT is regularly cited in reports and testimony from opponents ranging from consumer groups to the IRS's own taxpayer advocate, Nina Olson.

Olson has called the AMT a "time bomb." Congress, however, faces serious problems in disarming it, notably because of the political and policy choices that would have to be made in order to replace the vast amount of revenue the AMT brings to the U.S. Treasury.

The reality of budget constraints, however, is likely to force Capitol Hill to again focus first on short-term fixes while a longer-term AMT solution is studied.

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Comprehensive tax reform
After the 2006 elections, control of the House and Senate shifted from the Republicans to the Democrats. However, the shift did not produce any large-scale changes in the basic tax system.

Part of the reason for the lack of action was the impending presidential election. Both major party candidates have offered tax proposals which they say will reduce taxes for many Americans. But given the growing budget deficits, exacerbated by the rescue plan enacted in the wake of the financial sector's difficulties, any major tax code changes will be difficult regardless of which candidate moves into the White House in January.

The same issues that have thwarted previous attempts to overhaul the tax code remain, specifically how to simplify tax laws while simultaneously keeping tax rates low, reforming the AMT, encouraging savings and investment, and promoting home ownership and charitable giving.

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Increasing standard mileage rate for charitable travel
Rising fuel costs in 2008 created problems for drivers and the IRS. The price at the pump is one factor the IRS considers in deciding when and how much to increase the deductible mileage allowances for various types of travel.

The mileage rates for travel related to business, medical treatments, and moving are reviewed at least annually. In some situations, the rates are increased before then. That was the case in 2008, when, effective July 1, the IRS bumped up the mileage rate for business travel to 58.5 cents per mile and the moving and medical travel rates to 27 cents per mile.

The rate for miles driven in connection with charitable activity, however, remained at 14 cents per mile. The reason? The charitable mileage rate is set by statute.

Congress periodically has attempted to change the charitable mileage limit to bring it more in line with the other rates. Some progress was made in this regard, but only for mileage related to specific major disasters that occurred in 2008.

As part of the Economic Stabilization Act of 2008, signed into law on October 3, 2008, individuals who use their vehicles to provide disaster relief to Midwestern flood and tornado victims will be able to deduct 41 cents per mile, 70% of the current business mileage rate, through the end of 2008.

Expect the next Congress to continue to look at increasing the 14-cent limit for all miles driven for any charitable purpose.

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