Charitable Giving 1 Taxation and Giving Income Capital

Charitable Giving 1 Taxation and Giving: Income, Capital Gain, Basis, AGI

Taxation and Giving • Types of Income • Adjusted Gross Income • Requirements for Income Tax Charitable Deduction • Limitations

Donor Mrs. Neufy • 78 years old • Considering life income gift • And just a little hearing impaired

Types of Income • Ordinary Income • Tax Exempt Income (Not taxed) • Capital Gain • Return of principal (not taxed)

Ordinary Income • General rule: Ordinary income is taxable in full (100%) • Types of ordinary income: • Income from labor: wages, salaries, bonuses, sales commissions, earnings from sale or exchange of assets • Income from investment: interest, dividends, rents, royalties • Withdrawals from qualified retirement plans (RMD)

Importance To PGTS Gift Planners • Distribution of assets • Toxic assets (income taxable) • Non-toxic assets (not taxable)

Income Tax Strategy • Avoid paying income tax • Delay when payment is due • Pay income tax due

Why is this Important for Planning? • Possible increased charitable deduction • Real Estate: recapture of accelerated depreciation • Gifts of inventory • Income paid to gift plan beneficiaries • Pooled Income Fund, CGA, CRT • Revocable and Irrevocable Trusts • Interest, dividends, rents, and royalties

Tax Exempt Income • General Rule: Tax-exempt income escapes taxation (0% taxable) • Types of tax exempt income: • • Interest from municipal bonds Life insurance proceeds (generally) Value of gifts and inheritances Return of principal from annuities

Importance To PGTRS • Gift annuities: tax-free return of principal • Pooled income fund prohibited from investing in tax exempt investments • Charitable remainder trusts potentially payout tax exempt income • Some charitable lead trusts invest in tax exempts • Some revocable trusts may have tax exemptions

Capital Gain Definition: the gain realized from the sale or exchange of a capital asset. Basic equation: Amount Realized (sales price) Less: Adjusted Basis Equals: Gain

Capital Gain Capital Asset a. General Rule: Everything is a capital asset except 1) Inventory in a trade or business; 2) Work of art in the hands of the artist who created it --Presidential papers, etc. --Nathan Greene painting 3) Accounts receivable arising from sale of inventory or stock in trade b. Effect of sale or exchange of non-capital asset: Gain realized is ordinary income and 100% taxable.

Capital Gain • Assets in the bypass trust don’t belong to the surviving spouse – however he/she is usually entitled (by the terms of the trust) to use them or collect any income they generate • When second spouse dies – bypass trust assets transferred to couple’s children • Assets are not subject to estate tax as they were already taxed at the first spouse’s death

Importance To PGTRS • Donors must pay tax on capital gain • Avoid capital gain tax by charitable gift • Life income gifts • Turn appreciated or depreciated assets into income stream at effective tax cost • Immediate charitable income tax deduction

Capital Gain Review Definition: the gain realized from the sale or exchange of a capital asset. Basic equation: Amount Realized (sales price) Less: Adjusted Basis Equals: Gain

Basis • Purchase cost Plus: Improvements Less: Depreciation Equals: Adjusted Basis

Types of Basis - Depends on How Property Acquired Step-up/Step-down • • • Acquired as a result of death Basis steps to FMV at date of death Holding period long term Little or no gain or loss on immediate sale Future sale could result in a gain or loss Carry-over • Acquired by gift during life • Donee receives donor’s basis and holding period • Donee basis will be FMV if lower than basis

Importance To PGTRS • Whenever your organization receives a capital asset • Revocable Trust • Obtain basis and holding period • Calculate gain or loss on sale • Basis on distribution at maturity • Gift annuity • Calculate tax character of payments • Charitable remainder trust

Taxation and Giving • Adjusted Gross Income AGI is “Total (Gross) Income” Less: “Above the Line” deductions Equals: Adjusted Gross Income

AGI • Above the line deductions important • Available to all • Reduces AGI

Importance To PGTRS Planners • AGI is benchmark for determining limitations on personal deductions • Charitable gift deduction limitation • 50% of AGI for cash • 30% of AGI for appreciated capital asset • AGI is not a complex number, but is integral to gift planning

Importance to PGTRS & Donors • Mrs. Nuefy • 78 years old • Considering life income gift • And just a little hearing impaired • Explain things so she can understand • Recommend she see her tax advisor