Year-end planning is a ritual for many of our friends who like to coordinate their tax and gift planning. But it may take on additional significance as we adjust to the changing tax laws and marketplace. Individuals who want to make a difference for future generations should consider how they can increase the impact of their giving. A gift completed by December 31 can reduce your tax bill for the current year. Here are some important ideas that may be helpful with your year-end gift planning.
Cash Gifts and Tax Savings Cash is still the most popular - and simplest - kind of charitable gift. If you itemize your deductions, your cash gift is deductible in the year of the gift up to 50% of your adjusted gross income. Your actual tax savings depends upon the amount of your gift as well as your income tax bracket.
Example: Mary makes a $5,000 charitable gift. She is in a 35% tax bracket. Her tax savings will be $1,750 (amount of gift multiplied by tax bracket). The after-tax cost of her $5,000 gift is only $3,250.
Year-End Planning Strategies for Giving and Saving Taxes More Savings with Gifts of Appreciated Property
Did you know that you can give shares of that stock or mutual fund to us and enjoy greater tax savings than with a comparable cash gift? The reason: you receive an income tax charitable deduction for the full fair market value of the shares (assuming you have held them for more than one year) up to 30% of your adjusted gross income (AGI). You also avoid any capital gains tax on the appreciation, even though this built-in gain has never been taxed. By using the untaxed gain to generate tax deductions, you substantially reduce the tax on your reportable income.
Example: Robert gives us shares of long-term appreciated stock valued at $5,000. His cost basis is $1,000. If he sold the stock he would incur a capital gains tax of $600 on the $4,000 gain ($4,000 x 15% capital gains rate). By giving the stock to us he receives a deduction for the full fair market value of the stock ($5,000). In his 35% tax bracket he saves $1,750 and avoids the $600 capital gains tax liability. The net cost of his gift is only $2,650 ($5,000 - $1,750 - $600) compared to $3,250 for a cash gift of $5,000. Because the tax law provides special incentives to encourage gifts of long-term appreciated property, you actually can have a greater impact with your giving at a lesser cost.
Note: If your deduction exceeds the 30% AGI limitation, you may carry over your excess deduction for up to five years.
Gifts That Increase Your Income
There are gift arrangements that permit you to retain an income, enjoy immediate tax savings, and ultimately leave a gift that will have an impact on our programs. One of the most popular of the life income gift plans is the charitable gift annuity. In exchange for your gift, we promise to provide fixed payments for your lifetime. Payment rates depend on the annuitant's age, and are better than you might expect. What's more, the donor receives an immediate income tax charitable deduction. The charitable gift annuity may be particularly appealing to the donor who is looking for an assured income but who also wants an immediate charitable deduction. Gift annuities are so popular that many of our donors have more than one. Another plus: they are easy to set up. You can get started simply by calling our office. A gift annuity may provide you with an excellent opportunity to make a deductible year-end gift and, at the same time, receive more fixed income.
Long-Term Opportunities
Year-end may be a time to reflect about long-term as well as short-term planning. Here are some long-term gift planning ideas that merit special attention.
A Bequest in Your Will.
As you plan for loved ones, you may want to include charitable institutions meaningful to you. You can leave a specific dollar amount or specific property, a percentage of your estate, or what's left of your estate after other bequests, taxes and costs are satisfied.
Other Beneficiary Designations.
As with a bequest under your will, you can name us as the beneficiary of a living trust, a life insurance policy, or retirement plan account. Remember that retirement plan assets often pose problems when given to family because of IRD (income in respect of a decedent), but not when given to charity.
Other Life Income Plans.
In addition to the charitable gift annuity, you may want to take a look at one of our charitable remainder trust plans. The charitable remainder trust gives you the opportunity to achieve a wide range of long-term objectives such as supplementing your retirement income or providing for a dependent relative.
Fast Facts about Popular Charitable Giving Options
Outright Gift of Cash.
Simplest of all gifts to implement. Just transfer cash, write a check or use your credit card. Your gift is fully deductible up to 50% of AGI with a 5-year carryover of any excess deduction.
Outright Gift of Long-Term Appreciated Securities.
Also easy to carry out and the most popular non-cash gift. Just transfer possession and any document of title to charity. The gift is deductible up to 30% of AGI, with a 5-year carryover provision. There is no capital gains tax owed on the appreciation.
Charitable Remainder Annuity Trust (CRAT).
A CRAT will pay a donor or other beneficiary at least 5% of the initial principal for the person's life or for a period of up to 20 years. A CRAT cannot receive subsequent contributions. There is no capital gains tax when appreciated property is transferred to the CRAT. A donor can deduct the present value of charity's remainder interest, subject to the 50% (cash gift) or 30% (long-term appreciated property) of AGI limitation.
Charitable Remainder Unitrust (CRUT).
CRUT receives gift and pays back to donor or other beneficiary at least 5% of the annual value of the trust principal, either for life or for a period of up to 20 years. If the corpus goes up or down in value, so does payout amount. A CRUT can receive subsequent contributions. There is no capital gains tax when appreciated property is transferred to the CRUT. A donor can deduct the present value of charity's remainder interest, subject to the 50% (cash gift) or 30% (long-term appreciated property) of AGI limitation. The CRUT is the most flexible of charitable remainder trusts and often can act as a hedge against inflation.
Charitable Gift Annuity.
Donor transfers cash or appreciated property to charity and receives back fixed payments for life. The payment amount is based on age(s) of beneficiary(ies) and is partly tax-free until beneficiary reaches life expectancy. If appreciated property is given, some of the capital gain is recognized ratably over donor's life expectancy if the donor is a beneficiary. Donor can deduct immediately the value of the property given, minus the present value of the income stream from the annuity, subject to the 50% (cash gift) or 30% (long-term appreciated property) of AGI limitation.
Life Insurance. Donor can use life insurance in many ways to make tax-wise charitable gifts. An irrevocable assignment of a life insurance policy to charity can generate an income tax deduction for the policy's cost basis or cash surrender value, whichever is lower, with future premiums also deductible on policies that are not paid up. Life insurance can also be used to replace for family members the wealth contributed to charity.
Let Us Hear from You
Year-end is indeed a special time to give. Through creative gift planning, you may very well be able to do more for yourself and for the causes that are important to you. Please let us know if we can be of assistance to you and your advisors as you review your year-end planning options.
TAX-WISE TIPS FOR YEAR-END
GIFTS
Gifts by Check or Credit Card:
When you write a check to charity, the gift is complete when the check is mailed. Mail it by December 31, and you can deduct it for the year 2014 even if the charity does not cash it until 2015. When you charge your gift to a bank credit card, it is deductible by the donor in the year the charge is made.
Pledges and IOUs:
If you have made a pledge to charity or given it your personal note, you cannot deduct this as a charitable contribution in 2014 unless you actually satisfy the pledge or pay off the note by December 31, 2014.
Gifts of Stock:
A gift of stock may be accomplished by electronic transfer or by the donor's delivery of the stock certificate to charity, in person or by mail. Ownership of the stock certificate is changed to the charity on the books of the corporation issuing the stock.
Gifts of Appreciated Property:
Gifts of appreciated property that would result in long-term capital gain if sold generally produce even greater benefits for you than gifts made in cash, by check, or by credit card. The reason? You can generally deduct the full value of the contributed property (subject to the 30% of AGI limitation), even the gain portion that has never been taxed. Gift assets to consider include not only stocks, but bonds, mutual funds, real estate and other appreciated property.
Gifts of Loss Property:
"Loss property" is property that would generate a tax-deductible loss if you sold it. If you gave this property to charity you would lose your deduction for the loss in value of the property. So, sell the property, take the loss as a deduction, and use the proceeds of the sale to make your deductible charitable gift. If your employer offers a gift matching program, you can multiply the impact of your gift simply by requesting the match from your employer.
Disclaimer
Neither the author, the publisher, nor The
Salvation
Army is engaged in legal or tax advisory service. For advice or
assistance in
specific cases or whether to make certain a contemplated gift
fits well into
your overall circumstances and planning, the services of an
attorney or other
professional advisor should be obtained. The purpose of this
website is to provide
general gift, estate, and financial planning
information. Watch for tax
revisions. State laws govern wills, trusts, and
charitable gifts made in a
contractual agreement. Advice from legal counsel
should be sought when
considering these types of gifts.
The Salvation Army, an international movement, is an evangelical part of the universal Christian church. Its message is based on the Bible. Its ministry is motivated by the love of God. Its mission is to preach the gospel of Jesus Christ and to meet human needs in His name without discrimination.