Senior Estate Planner, Mike Repak, discusses strategies for year-end gifts that can help reduce taxes come filing time.
Giving back to enrich one’s community can be one of the most rewarding experiences for both the donor and recipient. According to Giving USA, Americans gave more than $427 billion to charities in 2019.* There has been a consistent increase in giving
over the past five years, so we hope this trend continues. While the act of philanthropy can yield heartwarming results, there are also lucrative benefits to giving as well, specifically when it comes to taxes. Although it is never a good idea to
allow the “tax tail to wag the dog,” it is necessary to consider what benefits you are entitled to prior to making a gift to your favorite charity. In addition, it is important to speak with your advisors (financial, accounting, legal)
about the timing of a gift so that you can optimize your gifts to meet your specific needs.
There are many options for charitable giving, from direct contributions of cash and property, to donor-advised funds, foundations, and charitable trusts. Consider gifting securities that you have held for at least one year. This will help to ensure you receive the full value deduction for the donation and that you will not have to pay capital gains tax on the securities’ appreciation.
Gifts to family
In 2019, you can give up to $15,000 annually to any individual ($30,000 for a couple) and that gift is exempt from tax reporting. People with large families can save significant taxes by taking advantage of this provision. Payments made directly to the
providers of health or educational services on behalf of another person are also excluded from gift tax consequences. This can allow grandparents to pay tuition for their grandchildren as a way of reducing the size of their taxable estate.
Outright gifts of cash (which include donations made via check, credit card and payroll deduction) are the easiest. The key is to substantiate them. To be deductible, cash donations must be:
- Supported by a canceled check, credit card receipt or written communication from the charity if they’re under $250,
- Substantiated by the charity if they’re $250 or more, or
- Made to a qualified charitable organization
In 2018, deductions for cash gifts to public charities can’t exceed 60% of your adjusted gross income (AGI). The AGI limit is 30% for cash donations to non-operating private foundations. Contributions in excess of the applicable AGI limit can be
carried forward for up to five years.
Appreciated publicly traded stock that you’ve held for more than one year is long-term capital gains property, which can make one of the best charitable gifts. Why? Because you can deduct the current fair market value and avoid the capital gains
tax that would be due if you sold the property. However, caution should be used if you are seriously ill or elderly, as it may be worthwhile to hold very low-basis stock for your heirs so that they may receive a step-up in basis at your death.
Donations of long-term capital gains property are subject to tighter deduction limits—30% of AGI for gifts to public charities, 20% for gifts to non-operating private foundations. In certain, although limited, circumstances, it may be better to deduct your tax basis (generally the amount paid for the stock) rather than the fair market value, because it allows you to take advantage of the higher AGI limits that apply to donations of cash and ordinary-income property (such as stock held one year or less). Don’t donate stock that’s worth less than your basis. Instead, sell the stock so you can deduct the loss and then donate the cash proceeds to charity.
Charitable Remainder trusts
To benefit a charity while helping ensure your own financial future, consider a charitable remainder trust (CRT). CRTs, which have always offered benefits to individuals, could become very attractive again—since capital gains tax rates can be as
high as 20% and the 3.8% Medicare surtax applies. Since appreciated assets that are transferred to a CRT are not taxed, the full value of these assets is available to provide income to the donor, generating much more income than if the donor had sold
the asset, paid the capital gains tax, and reinvested the proceeds.
- For a given term, the CRT pays an amount to you annually (some of which generally is taxable).
- At the term’s end, the CRT’s remaining assets pass to one or more charities.
- When you fund the CRT, you receive an income tax deduction for the present value of the amount that will go to charity.
- The property is removed from your estate.
A CRT also can help diversify your portfolio if you own non-income-producing assets that would generate a large capital gain if sold. Because a CRT is tax-exempt, it can sell the property without paying tax on the gain at the time of the sale. The CRT
can then invest the proceeds in a variety of stocks and bonds. You’ll owe capital gains tax when you receive CRT payments, but because the payments are spread over time, much of the liability will be deferred. Plus, only a portion of each payment
will be attributable to capital gains; some may be considered tax-free return of principal.
Charitable Lead Trusts
To benefit charity while transferring assets to loved ones at a reduced tax cost, consider a charitable lead trust (CLT): • For a given term, the CLT pays an amount to one or more charities.
- At the term’s end, the CLT’s remaining assets pass to one or more loved ones you name as remainder beneficiaries.
- When you fund the CLT, you make a taxable gift equal to the present value of the amount that will go to the remainder beneficiaries.
- The property is removed from your estate.
For gift tax purposes, the remainder interest is determined assuming that the trust assets will grow at the Section 7520 rate. The lower the Sec. 7520 rate, the smaller the remainder interest and the lower the possible gift tax—or the less of your
lifetime gift tax exemption you’ll have to use up. If the trust’s earnings outperform the Sec. 7520 rate, the excess earnings will be transferred to the remainder beneficiaries tax-free. The Sec. 7520 rate remains low by historical standards,
therefore, now may be a good time to take the chance that your actual return will outperform it. As long as the Sec. 7520 rates remain favorable, charitable lead trusts can be used now by charitably inclined individuals to shift significant wealth
while using only an insignificant amount of their estate/gift tax exemption.
Remember to discuss all gifting and tax questions with your experts. Working together, your Janney financial advisor, accountant and attorney can determine the best outcome for your family and tax situation.
Janney Montgomery Scott LLC, its affiliates, and its employees are not in the business of providing tax, regulatory, accounting, or legal advice. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any taxpayer for the purpose of avoiding tax penalties. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.