Your Taxes: How to optimize charity donations for taxes - opinion

The Israeli Tax Authority has just published a notice about optimizing charity donations (“Credit for Donations of Capital Assets In Kind,” April 21, 2024).

Charitable giving, or tzedakah, is an important part of the Jewish religion. Helping others in need is not only a good deed, it can be tax efficient. Now the ITA has spelled out how to make it doubly tax efficient. In short, donate non-cash assets to the right charity.

What the ITA notice says:

The ITA notice says that when a donation to a “public institution” (i.e. a charity) approved under Section 46 of the Israeli Income Tax Ordinance is made in kind (i.e. a non-cash asset) without consideration, a tax credit may be given for the value of the donated item. An appraiser’s valuation must be attached to the donation receipt. Examples of in-kind donations include artwork, equipment, computers, and real estate.

The Section 46 tax credit is generally 35% for an individual donor or 23% for a corporate donor, for donations between NIS 207 and NIS 10,354,816 (in 2024), but no more than 30% of taxable income. Any unused tax credit may be carried forward up to three tax years.

The ITA notice goes on to say that where applicable conditions are met, an in-kind donation to a “public institution” may qualify not only for a tax credit but also an exemption from capital gains tax – or land appreciation tax in the case of Israeli real estate.

Getting a tax credit and a tax exemption is doubly good news.

What is a public institution?

A public institution is essentially a charity. It is an association of at least seven unrelated members that exists and acts for a public purpose. A public purpose is one relating to religion, culture, education, settlement, science, health, welfare, sport, or anything else approved by the finance minister. A public institution must keep books and report to the Israeli Tax Authority.

What’s the catch?

Business inventory is not discussed. Israeli purchase tax of up to 10% for a recipient of real estate is not expressly mentioned. The public institution will be taxable on its gain and the donor’s paper gain if it sells the donated property within five years (Sec. 61(c) of the Real Estate Tax Law). A public institution should take advice on all aspects.

Examples:

The ITA notice doesn’t give examples, but let’s see. Suppose an individual donates an investment property (in addition to the individual’s home) to a charity approved under Section 46. The property cost NIS 1 million and is now worth NIS 5m. according to an appraiser. Given the ITA notice it appears that: (1) the paper gain of NIS 4m. may not be taxable, and (2) the donor may get a tax credit reducing their income tax bill that year by up to NIS 1.75m. (35% of NIS 5m.), but no more than 30% of taxable income.

What can go wrong? Here’s a second example. A builder donates an unsold home worth NIS 5m. to a public institution. While this is a noble act, the home counts as business inventory, not a fixed asset. Therefore, the ITA notice does not apply in this case.

Other countries have it, what’s the big deal?

Sometimes multinational families find estate tax planning works for tax purposes in one country but not in other countries like Israel. The ITA has now spelled out that donating appreciated assets to charity may work well for Israeli tax purposes.

The Albert Benin case:

The United Jewish Appeal, Federation of Jewish Philanthropies of Greater New York (UJA), recently won a District Court case allowing an exemption on a property paper gain under an obscure 1952 tax treaty between Israel and the Jewish Agency, which the UJA belonged to. The ITA has now pointed out a broader approach to consider (case 22968-06-21, January 17, 2024).

US-Israel tax treaty:

The US-Israel tax treaty has special rules that may allow a tax break in both countries for donations to a US “Friends of Israel” charitable organization “if and to the extent such contributions would have been treated as charitable contributions had such an organization been a charitable organization for the income tax laws of Israel” but no more than 25% of taxable income from US sources.

Would this qualify for the double Israeli tax relief under the ITA notice? What about a US tax deduction? Perhaps – but the ITA notice is silent on treaty aspects.

As always, consult experienced tax and legal advisers in each country at an early stage in specific cases.

leon@hcat.co

The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd