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Who’d have thought it. The first proposal that Congress came up with to help the victims of hurricane Katrina was a proposal to permit people who died in the hurricane avoid the estate tax. Anyone looking at pictures of the city and those fleeing the rising waters in New Orleans could tell at a glance that the survivors were worrying that if they drowned their survivors might have to pay significant estate taxes. Aware of this concern, Republicans in Congress proposed that tax on the estates of all who died leaving behind more than $1.5 million be waived. Sadly, that particular provision did not become law. As a result, families of those who died leaving behind more than $1.5 million in assets may face high estate taxes that could have better been spent by the survivors on rebuilding the substandard housing in which many of them had lived before the hurricane arrived. The Katrina Emergency Tax Relief Act of 2005, however, did become law.
The Act has many wonderful provisions one of which is worthy of mention here. It pertains to charitable contributions made before the end of the year and will prove an enormous boon to hurricane survivors.
Prior to the enactment of this law, people who wanted to make large gifts to charities were limited in how much they could give and still benefit from reduced income tax liability. That is because deductions for charitable gifts are normally limited to 50% of the taxpayer’s adjusted gross income. Thus, a taxpayer who has adjusted gross income of $100,000 can only deduct charitable gifts of $50,000. Gifts in excess of that amount may be deducted in limited amounts over the following five years. As a result, many us who wanted to make large charitable gifts found our charitable instincts and tax saving instincts in hopeless conflict. Although we may have wanted to give away all of our adjusted gross income to charities, the fact that we received no income tax benefit (and would have no money on which to live) dissuaded us. In addition, we knew that when our adjusted gross income reached $145,950 (unless we were married filing separately) a phase out would cause us to lose a percentage of our deductions. If we had the misfortune to have really high adjusted gross income, we would lose up to 80% of the value of our deductions. Thanks to the Hurricane Katrina, relief from these provisions has been given for the rest of this year.
The Act says, among other things, that in order to help out the victims of Katrina, charitable contributions of up to 100% of a donor’s gross income can be deducted. The phase out is eliminated. The only restrictions are that the gift must be made in cash before January 1, 2006 and must go to a public charity. Thanks to the Act, if any of my readers with an adjusted gross income of $10 million has been wanting to make a gift of $10 million to the Museum of Modern Art in New York, but has not done so because of the phase out and the 50% limit, the gift can now be made and the entire amount deducted, eliminating the donor’s tax liability. If that isn’t an incentive to make large gifts, it’s hard to know what is.
Some readers may wonder why permitting people to make extraordinary gifts to museums, symphony orchestras, opera companies, universities and the like benefits hurricane victims. Others may wonder what sorts of people are dissuaded from giving away all their adjusted gross income solely because they don’t get any income tax benefits from doing so. I can answer both questions.
Making a large gift to a museum does not benefit a hurricane victim who has lost a house. It benefits the museum. The answer to the second question is, The Very Rich.
The reason most of my readers do not give away all their income to charities is because they like to eat and food costs money. So does housing. Many of my readers use most, if not all, of their adjusted gross income, to survive. The only people for whom adjusted gross income is nothing more than a trifle are the very rich. Thus, it turns out that one of the most significant benefits of the Hurricane Relief Act of 2005, goes to Mr. Bush’s very wealthy friends and their pet charities. It is amazing how Congress and the president can make things appear to be what they are not.