Only 25 days remain to take advantage of a give-away in the
tax code for charitable givers. Ketra (the Katrina Emergency
Tax-Relief Act), passed in the wake of the hurricane that
devastated New Orleans and much of the Gulf Coast at the end
of August, will expire on December 31. Its provisions double
the maximum amount of charitable donations on which a taxpayer
can claim tax relief - even if the charity has nothing to
do with Katrina or the Gulf Coast.
Private banks, law firms and wealth managers have spent the
last few weeks urging clients to revise their philanthropic
plans for the year, while registered charities across the
US have been urging people on their data-base to take advantage.
Even People for the Ethical Treatment of Animals (Peta), whose
worthy remit has little or nothing to do with hurricane relief,
is telling its donors that Ketra is an "exciting opportunity".
But while there is agreement that the law Congress passed
in September creates a huge philanthropic opportunity, the
tight window of opportunity has createdconfusion. Some suggest
it is worth realising gains in a portfolio, taking money out
of a retirement account, or even taking out short-term loans,
to take advantage of Ketra. Others suggest those strategies
could backfire by opening donors to extra taxes elsewhere.
Taxpayers' deduction for all charitable contributions cannot
usually exceed 50 per cent of their adjusted gross income
for the year. For the relatively wealthy (in 2005, those who
have more than Dollars 145,940 in adjusted gross income, or
Dollars 79,975 for married taxpayers filing separately), their
charitable deductions are also reduced by a "hair-cut"
of 3 per cent.
Both provisions are eliminated under Ketra. Regardless of
your gross income you can give 100 per cent of it to a public
charity, all of which will be tax-deductible, providing the
gifts have been made by December 31.
Some consultants suggest this year's increased exemptions
are enough of an opportunity to justify taking gains - even
though they would be subject to capital gains tax - and immediately
donating the proceeds. The idea is that the additional income
and gains can be off-set by the extra deduction.
PG Calc of Cambridge, Massachusetts, which provides back-up
services for charitable fund-raisers, offers the example of
a65-year-old with an income of Dollars 200,000 and more than
Dollars 1m in a retirement fund who wants to give away Dollars
500,000. By withdrawing Dollars 500,000 from the account,
he will increase his adjusted gross income to Dollars 700,000,
and all of his Dollars 500,000 in donations will be tax-deductible.
There are risks involved with this. JP Morgan Private Bank,
in its mailing to clients, cautions that "these strategies
may produce unexpected surprises for the donor", because
raising gross income could increase the 3 per cent haircut
on other items "meaning the donor's tax bill might increase,
even though the qualified contribution would be fully deductible".
The bank says: "It could even prove economically beneficial
to borrow money in the short term (if, for example, you expect
a large cash bonus shortly after year-end) and use the cash
to make a qualified donation."
How did a measure this generous, whose chief beneficiaries
are those wealthy enough to consider giving away an entire
year's income, find its way on to the statute book? It was
passed when there was overwhelming political will to take
some kind of action to limit the suffering caused by Hurricane
There is also a justification for broadening tax relief beyond
charities directly involved in the relief efforts. Joshua
Kreitzer, a lawyer at the law offices of Marc Lane,
a Chicago-based wealth consultancy, points out that that there
was "real concern" among charities that Katrina
would dent donations elsewhere in the charitable sector. A
poll conducted by the charity database GuideStar found that,
of more than 3,900 non-profit organisations surveyed,38 per
cent expected contributions for the last quarter of 2005 to
be down from last year because of disaster relief giving -
while only4 per cent of organisations expected an increase
Republicans in Congress said the sweeping tax relief was
justified by the need to avoid perverse side effects for other
Democrats said the proposals had met with little resistance.
Of the broad range of tax breaks for the super-rich, the clauses
on charitable giving are the least offensive to liberals.
When the proposals were drafted they would have allowed rich
individuals to donate money to private charitable trusts.
But in its final form, the deduction is only available for
donations to public charities. This means donors are less
able to retain some control over the money.
Other points helped ensure Ketra could not be painted as
a "tax loop-hole for the rich" - its provisions
apply only to individuals, and not to companies, and donations
must be made only in cash. Donations of securities or appreciated
assets - a practice popular with wealth managers that functions
as a way to minimise capital gains tax liability - are excluded.
Democrats saw the plans as a relatively innocuous extension
of existing provisions. Even before the measures, wealthy
individuals were allowed to carry over deductions for donations
into subsequent years. Many Democrats believe the temporary
break will make little difference.
The welter of activity from private banks and other advisors
to the wealthy, as well as the concerted effort from charitable
fund-raisers around the country to use Ketra to encourage
donors into new giving, suggests they might be wrong.
Additional reporting by Christopher Swann in Washington
(c) 2005 The Financial Times Limited.