Charitable Planning in 2025

Published January 3, 2025

A new year provides an excellent opportunity to consider plans for charitable gifts in 2025. These gifts could include an IRA charitable rollover, a gift of cash or a gift of appreciated property.

1. IRA Charitable Rollover — The IRS refers to the IRA charitable rollover as a qualified charitable distribution (QCD). An individual over age 70½ is permitted to make a direct transfer from his or her IRA custodian to a qualified charity. The transfer is not included in taxable income. If the IRA owner is over age 73, the distribution may fulfill part or all of the IRA owner’s required minimum distribution (RMD).

Since many individuals have invested their IRAs in stocks, bonds or other securities, it may be necessary for the IRA custodian to exchange the IRA stock or bond account for a money market fund prior to the distribution. Most IRA custodians require a QCD to be paid from a money market account or similar fund. With equities markets at high levels, some individuals may choose to transfer funds from equities to a money market fund early in the year to prepare for their IRA charitable rollover. Talk with your IRA custodian to determine the next steps to make a QCD.

There are some limits for the IRA charitable rollover. The IRA owner must be at least age 70½ and the maximum transfer in 2025 is $108,000. The transfer must be to a qualified exempt charity and may be for a designated purpose or a field of interest fund. Transfers to donor advised funds or supporting organizations are not permitted. In addition, transfers may not be for a charity dinner or other event that involves a partial benefit to the donor. The entire QCD must be for a qualified charitable purpose.

2. Gifts of Cash — In 2025, individuals who itemize deductions may deduct charitable gifts of cash up to 60% of their contribution base, which is usually their adjusted gross income (AGI). While the 60% limit is substantial, some generous individuals give more and may carry forward the excess gift amounts and deduct them over the following five years. Some donors “bunch” their charitable gifts, meaning they itemize one year with the larger gifts and take the standard deduction the next year.

3. Gifts of Stock or Land — With substantial increases in value for both equities and real property, many donors find that a gift of appreciated property is attractive. A gift of appreciated stock or land provides two benefits for the donor. First, the donor may receive a charitable income tax deduction for the fair market value of the stock or land. Second, because the charity is tax-exempt, the donor can bypass tax on the capital gain. If a donor purchased stock eight years ago for $10 per share and it is now worth $50 per share, the donor would pay capital gains tax on $40 if he or she sold the stock. However, by giving the stock to charity, the donor may receive a charitable income tax deduction for the $50 in value and bypass the tax on the $40 of potential gain. Since the donor is receiving both the deduction and capital gain bypass benefits, this type of gift is permitted up to 30% of the donor’s AGI. Once again, if the gift value is over this limit, it may be carried forward for five years. For example, Mary has adjusted gross income of $100,000 this year and makes a gift of appreciated stock with fair market value of $40,000. She can deduct $30,000 this year and carry forward the remaining $10,000 charitable income tax deduction to the next year.

Editor’s Note: The first month of a year is a good time to make plans. In January, donors may wish to consider their options for charitable gifts in 2025.

Easement Deduction Denied for Building in Historic District

In Capitol Places II Owner LLC v. Commissioner; No. 16536-23; 164 T.C. No. 1, the Tax Court determined that a façade easement on a building in Columbia, South Carolina did not qualify for a charitable income tax deduction because the building was not listed on the National Register of Historic Places.

In 2014, Capitol Places II Owner, LLC (CPII) acquired the Manson Building in Columbia, South Carolina. In 2000, the prior owner had applied to the National Park Service (NPS) to have the building listed on the National Register of Historic Places. The NPS denied the application because the building had "lost important character-defining features" and "the storefronts on the first floor have also been altered." Due to the modifications, the NPS determined the building was within a registered historic district but was not "individually listed in the National Register."

On October 20, 2014, the Columbia Commercial Historic District was approved as a historic district. The Manson Building was one of 36 commercial buildings that were listed as "contributing" to the historic significance of the district while another 18 buildings were listed as “noncontributing.”

On December 17, 2014, CPII granted a façade easement to the Historic Columbia Foundation. The deed indicated that the building was in the Columbia Commercial Historic District and was therefore a “certified historic structure.” The façade easement was appraised, and the façade easement charitable income tax deduction was valued at $23.9 million.

CPII filed a 2014 income tax return and claimed the charitable deduction. The Internal Revenue Service (IRS) denied the deduction because the Manson Building was not listed on the National Register of Historic Places.

The Tax Court noted a façade conservation easement deduction must include a building that is deemed to be of historic significance. Section 170(h)(4)(C). Buildings are qualified if they are certified by the Secretary of the Interior to the Secretary of the Treasury as having historic significance. The Secretary of the Interior is permitted to grant historic status to buildings to preserve the historic nature of the property.

The Manson Building was not listed on the National Register of Historic Places. However, the taxpayer advanced three arguments. First, because it is in the historic district, the building qualifies for a charitable deduction for a façade easement. Second, since the building contributes to the historic district certification, it therefore is deemed to comply with the "certified historic structure" requirement. Third, the easement protects a "historically important land area."

The court determined that the existence of the historic area is separate from the requirement that a building be designated in the National Register of Historic Places. There are many buildings in historic areas that do not meet the requirements. If all buildings in historic areas were qualified, there would be no legislative purpose in requiring a building to be listed on the National Register of Historic Places.

The Tax Court found that while the building did contribute to the designation as a historic district, it is not sufficient to qualify. In addition, a façade easement on a building is not protection of a "historically important land area." Therefore, the easement property is not qualified and the deduction is denied.

Will the Supreme Court Stay the Transparency Act Injunction?

In 2021, Congress passed the Corporate Transparency Act (CTA). The purpose of the CTA was to reduce “money laundering, tax fraud, human and drug trafficking and the financing of terrorism.” The CTA requires disclosure of the beneficial owners’ names, dates of birth, addresses and unique identifying numbers, which could be satisfied by a driver’s license number or passport number. The CTA is generally applied to companies or business entities with $5 million or less in annual revenue and 20 or fewer employees. However, there are numerous exemptions to the CTA reporting requirement. The initial registration deadline was January 1, 2025.

On December 3, 2024, a Fifth Circuit District Court determined that the CTA was not constitutional and issued a preliminary injunction. While the plaintiffs in the case initially sought an injunction affecting their region, the District Court issued a universal injunction that was applicable nationwide.

On December 23, 2024, the motions panel of the Fifth Circuit stayed the universal injunction. The motions panel stated, “the CTA at least operates constitutionally when it requires that corporations engaged in business operations affecting interstate commerce disclose their beneficial owner and applicant information." The Fifth Circuit determined the potential harm to businesses under the CTA was minimal and the government had a substantial interest in preventing financial crimes and defending national security.

However, on December 26, 2024, the merits panel of the Fifth Circuit vacated the stay and reinstated the universal injunction. The merits panel determined the injunction should be maintained until the case is resolved in an expedited hearing.

On December 26, 2024, the United States Department of Treasury petitioned the U.S. Supreme Court and requested a stay of the injunction until the merits are determined. The Department of Treasury noted the universal injunction causes irreparable harm to the Federal Government. It "impedes efforts to prevent financial crime and protect national security, undermines the United States' ability to press other countries to improve their own anti-money laundering regimes, and severely disrupts the ongoing implementation of the Act." Treasury also noted there were only minimal burdens on the companies to report.

In addition, Treasury suggested the Supreme Court may consider the powers of the District Court to issue a universal injunction. Two other District Courts held the CTA was constitutional and the universal injunction of the Fifth District Court essentially overrules the decisions of other District Court judges.

Editor's Note: This is an opportunity for the U.S. Supreme Court to limit the power of injunctions. It is a classic case in which one District Court is attempting to impose its will on other District Courts that have considered the same legal issues. The Supreme Court will have the opportunity to review the circumstances under which a District Court can issue a universal injunction that may be in conflict with other District Court’s decisions.

Applicable Federal Rate of 5.2% for January: Rev. Rul. 2025-1; 2025-3 IRB 1 (16 December 2024)

The IRS has announced the Applicable Federal Rate (AFR) for January of 2025. The AFR under Sec. 7520 for the month of January is 5.2%. The rates for December of 5.0% or November of 4.4% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2025, pooled income funds in existence less than three tax years must use a 4.0% deemed rate of return. Charitable gift receipts should state, “No goods or services were provided in exchange for this gift and the nonprofit has exclusive legal control over the gift property.”