Why is a tax incentive needed for charitable gifting?
The State of Nebraska is at a critical juncture in terms of its philanthropic
potential. An estimated $258 billion will be transferred from one generation
to the next over the next 50 years ($52 billion annually). Much of this wealth
will be lost to taxes or to heirs residing outside of the state. (See Transfer
of Wealth Study by counties at www.nebcommfound.org).
What is the purpose of this new tax credit?
To encourage Nebraskans to make gifts to qualified endowments with Nebraska
charities that will benefit Nebraska. A qualified endowment means a permanent,
irrevocable fund that is used for Nebraska charitable purposes. The funds
are held by a Nebraska incorporated or established tax-exempt organization
or held for the organization by a bank or trust company.
What is an endowment?
It is somewhat like a savings account. The differences are that only the investment
earnings are used for your Nebraska hometown or Nebraska based charity. Secondly,
the principal amount of the fund, your charitable gift, will not be used.
This assures continuous and growing funds for your hometown or favorite charity.
When is the credit effective?
For tax years beginning on or after January 1, 2006 and is currently set to
run through December 31, 2009.
How much is the credit?
Nebraska residents, Sub-Chapter S corporations, partnerships, limited liability
companies, estates and trusts are entitled to a 15% credit of the Federal
charitable contribution deduction for qualifying planned gifts, up to an annual
maximum credit of $5,000.
Nebraska corporations, estates and trusts are allowed a credit for 10% of
the qualifying outright gifts up to an annual maximum credit of $5,000.
The credit cannot be carried back or forward and it is not a refundable credit.
The credit can be used as a dollar for dollar offset of Nebraska income taxes
in addition to using the Federal itemized deduction, upon which the credit
is calculated, to reduce federal income taxes.
What type of charitable gifts qualify?
For Nebraskan residents, Sub-Chapter S corporations, partnerships, limited
liability companies, estates and trusts only qualifying planned gifts to endowments
made using certain irrevocable planned gifts will qualify for the credit.
The following planned giving methods will qualify: a charitable remainder
unitrust or annuity trust, a charitable lead unitrust or annuity trust, a
charitable gift annuity, a deferred charitable gift annuity, a charitable
life estate agreement, a paid-up life insurance policy, or a pooled income
fund trust.
For Nebraska corporations, estates or trusts only qualifying outright gifts
to endowments made with gifts of cash or other assets will qualify for the
credit.
Can an endowment be established in someone's honor or
in memory of a loved one?
Yes, the annual distributions made from an endowment fund can be designated
to be made in the name you select for the fund.
John Smith is 70 years old and is interested in a way to increase his retirement income. Also, he wants to receive a fixed stream of income for his lifetime. In addition, John wants to make a gift to his Hometown that has been so good to him and his family. John decides to give $10,000 to the Nebraska Community Foundation to establish a charitable gift annuity. With this gift he is guaranteed a fixed annual income of 6.5% ($650) for the rest of his life.
In the charitable gift annuity agreement John directs that any funds remaining in the gift annuity upon his death are to be deposited into his Hometown's qualified endowment with the Nebraska Community Foundation.
Below are the calculations illustrating the EndowNebraska Tax Credit for which John is eligible:
Assumptions:
Income beneficiary 70-year-old
Gift of cash to fund charitable gift annuity $10,000
Annuity payment rate 6.5%
Federal Charitable Tax Deduction $4,316.40
EndowNebraska Tax Credit for Gift:
Nebraska Tax credit rate 15%
Total Nebraska Tax Credit for gift $ 647.46
($4,316.40 x .15)
Out of Pocket Cost of Gift:
Gifted Amount $10,000.00
Less:
Federal Tax Savings (25% rate) 1,079.00
Nebraska Tax Savings (7% rate) 302.00
Nebraska Tax Credit (15% credit) 647.00
Net Out of Pocket Cost of Gift $ 7,972.00
These calculations are for illustration purposes only and should not be considered legal, accounting, or other professional advice.