TAXEFFECTIVE CHARITABLE GIVING Tax Effective Charitable Giving 1
TAX-EFFECTIVE CHARITABLE GIVING Tax- Effective Charitable Giving 1
TAX-EFFECTIVE CHARITABLE GIVING Current Landscape of Philanthropy Charitable giving continues to increase 1 An overwhelming majority of that giving is done by individuals 1 69% 1 Individual Foundations Bequests Corporations 2 “Giving USA 2020 Study, ” Lilly Family School of Philanthropy. FOR ADVISOR USE ONLY
TAX-EFFECTIVE CHARITABLE GIVING Common giving strategies and vehicles Testamentary and Split-Interest Gifts Giving While Living • • Outright Gifts Community Foundations Donor-Advised Funds Private Foundations • • Bequests Gift from Trusts/Estates Charitable Remainder Trusts (CRTs) Charitable Lead Trusts (CLTs) 3 FOR ADVISOR USE ONLY
TAX-EFFECTIVE CHARITABLE GIVING Giving with a donor-advised fund (DAF) A donor-advised fund, is one of the easiest and most tax-advantageous ways to give to a charity 1 2 3 Give Grow Grant Make a tax-deductible charitable contribution Contributions can be invested Recommend grants to IRS-qualified charities • Potential for assets to grow tax free • Online capabilities • Minimize capital gains taxes by contributing long-term appreciated assets • Simplify recordkeeping • Maximize support to charities • Single donation can support multiple causes • Ability to frontload and support charities over time • Involve family in giving and leave a charitable legacy • Anonymity, if desired 4 FOR ADVISOR USE ONLY
TAX-EFFECTIVE CHARITABLE GIVING New Legislation
TAX-EFFECTIVE CHARITABLE GIVING The Consolidated Appropriations Act, 2021 Impact on charitable giving Extended Tax Incentives for Charitable Cash Contributions $300* 100% 25% Above-the-line deduction per taxpayer on non-itemized returns AGI limitation increase for individuals itemizing (previously 60%) AGI limitation increase for corporations (previously 10%) • Only apply to cash contributions made in 2021, and not to supporting organizations or donor-advised funds (DAFs) • Existing AGI limits for contributions to private foundations and DAFs remain unchanged • Smartest strategy will depend on each client and their goals 7 FOR ADVISOR USE ONLY
TAX-EFFECTIVE CHARITABLE GIVING Summary of Potential Tax Law Changes Current Law Potential Changes (Biden proposals) Value of charitable gifts Deduction saves tax on marginal rate Deduction limited to a 28% benefit. Restore PEASE for incomes over $400, 000. Long-term capital gains rate 20% 39. 6% on income over $1 million Step-up at death Current step-up appreciated property No step-up or a modified step-up Estate tax exemption $11. 7 million person at 40% rate $3. 5 million person and increasing rate to 45% 8 FOR ADVISOR USE ONLY
TAX-EFFECTIVE CHARITABLE GIVING Charitable Tax Strategies 1. Bunching/accelerating deductions 2. Asset Selection for Charitable Giving 3. Offsetting a Roth conversions with giving 4. Qualified Charitable Distributions 5. Utilizing a Testamentary CRT to Replicate Stretch IRA 6. Testamentary gifts 9
TAX-EFFECTIVE CHARITABLE GIVING Charitable tax incentives Income tax 2021 Deduction limits as a percentage of Adjusted Gross Income (AGI): Long-term appreciated property Cash • 100% to public charities • 60% to donor-advised funds • 30% to private foundations • 30% to public charities or private operating foundations • 20% to private foundations Generally, deductions exceeding these limits can be carried forward for up to five years 10 FOR ADVISOR USE ONLY
TAX-EFFECTIVE CHARITABLE GIVING Ramp Up Tax Savings Bunching Itemized Deductions $7, 315 SAVINGS $945 TOTAL SAVINGS Charitable Donation $25. 1 K Standard Deduction $315 SAVINGS $900 OVER $10 K $20, 900 OVER $30 K vs Mortgage Interest $6 K $6 K SALT $10 K 2021 2022 2023 2021 35% Income Tax Bracket This is a hypothetical example for illustrative purposes only. This chart assumes a married filing jointly couple who contribute a cash gift. The tax savings referenced here are specific to the charitable donation made above the $25, 100 standard deduction. Information herein is not legal or tax advice. $6 K
TAX-EFFECTIVE CHARITABLE GIVING Accelerate Deductions INCOME TAX RATE /BENEFIT STRATEGY #1 Annual giving strategy STRATEGY #2 Accelerated giving $10, 000 $10, 000 $10, 000 $100, 000 - TOTAL DONATION $100, 000 TAX SAVINGS $28, 900 $37, 000 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 37% 28% 28% 28% Additional $8, 100 (28% ) in tax savings! This is a hypothetical example for illustrative purposes only. The 28% is a hypothetical tax bracket based on President Biden’s proposal to cap itemized deductions at 28% for incomes above $400, 000. This chart assumes the donor contributes a cash gift. State and local taxes and the federal alternative minimum tax are not taken into account. Information herein is not legal or tax advice. FOR ADVISOR USE ONLY 12
TAX-EFFECTIVE CHARITABLE GIVING FIDELITY CHARITABLE Charitable Tax Strategies 1. Bunching/accelerating deductions 2. Asset Selection for Charitable Giving 3. Offsetting a Roth conversions with giving 4. Qualified Charitable Distributions 5. Utilizing a Testamentary CRT to Replicate Stretch IRA 6. Testamentary gifts 13 FOR ADVISOR USE ONLY
TAX-EFFECTIVE CHARITABLE GIVING Charitable tax incentives Capital gains tax Short term Long term (owned for a year or less) • Taxed at ordinary rates • Taxed at 15% for most, 20% for those in the highest income bracket • Additional 3. 8% Medicare surtax in some cases Eliminated when appreciated assets are contributed rather than liquidated and sold 14 FOR ADVISOR USE ONLY
TAX-EFFECTIVE CHARITABLE GIVING Not All Gifts Offer Same Tax Savings $10, 000 Gift Donor in Top Income Tax Bracket $1, 190 $2, 380 $3, 700 Benefit of Deduction 2 $3, 700 $6, 300 Cash $5, 110 50% Basis Stock (LTCG) Benefit of Embedded Tax Avoided 1 Effective Cost of Donation $3, 920 0% Basis Stock (LTCG) Applicable rate for stock of long-term appreciated gain is assumed to be 23. 8%. Deduction limited to 60% of AGI in year of gift for cash or 30% of AGI in year of gift of long-term appreciated publicly traded stock. Benefit of deduction assumes full use of deduction against income otherwise taxed at 37% tax rate. Gift is to an IRS-qualified public charity. 1 2 FOR ADVISOR USE ONLY 15
TAX-EFFECTIVE CHARITABLE GIVING Charitable Tax Strategies 1. Bunching/accelerating deductions 2. Asset Selection for Charitable Giving 3. Offsetting a Roth conversions with giving 4. Qualified Charitable Distributions 5. Utilizing a Testamentary CRT to Replicate Stretch IRA 6. Testamentary gifts 16
TAX-EFFECTIVE CHARITABLE GIVING Reduce Tax Cost of a Roth Conversion The charitable deduction from a donation can be applied against the increase in taxable income resulting from the conversion. This strategy is ideal for individuals Who expect higher taxes in the future Who have long investment time frames (more than five years) Who can pay the tax cost of the conversion with non-retirement dollars 17 FOR ADVISOR USE ONLY
TAX-EFFECTIVE CHARITABLE GIVING Reduce Tax Cost of a Roth Conversion Paying for a conversion with no charitable deduction Paying for a conversion with a charitable deduction $500, 000 $185, 000 To IRS Roth Account Out of Pocket Roth Account Hypothetical tax amounts assume a 37% federal tax rate, a $500, 000 Roth conversion amount and a $100, 000 fully deductible charitable contribution. The federal alternative minimum tax, and state and local taxes are not taken into account. FOR ADVISOR USE ONLY $100, 000 To Charity $148, 000 To IRS Out of Pocket 18
TAX-EFFECTIVE CHARITABLE GIVING Charitable Tax Strategies 1. Bunching/accelerating deductions 2. Asset Selection for Charitable Giving 3. Offsetting a Roth conversions with giving 4. Qualified Charitable Distributions 5. Utilizing a Testamentary CRT to Replicate Stretch IRA 6. Testamentary gifts 19
TAX-EFFECTIVE CHARITABLE GIVING Qualified Charitable Distribution (QCD) QCD eligibility begins at 70½ while required minimum distributions begin at 72 • • Up to $100, 000 from IRA can be distributed directly to public charities. Private foundations and DAFs are not eligible recipients. Offers advantage for clients looking to reduce total AGI, instead of “below the line” deductions—for those at the RMD eligible age of 72 or older Potentially reduces future RMDs Utilizing the QCD might make sense: Giving appreciated securities might be a better option: When the donor cannot itemize their deductions When the donor can itemize their deductions The majority of their assets are held in an IRA Owns highly appreciated assets in taxable accounts The RMD would push them into a higher tax bracket The RMD will not push them into a higher tax bracket For immediate donations For long-term strategic giving using a donor-advised fund 20 FOR ADVISOR USE ONLY
TAX-EFFECTIVE CHARITABLE GIVING Charitable Tax Strategies 1. Bunching/accelerating deductions 2. Asset Selection for Charitable Giving 3. Offsetting a Roth conversions with giving 4. Qualified Charitable Distributions 5. Utilizing a Testamentary CRT to Replicate Stretch IRA 6. Testamentary gifts 22
TAX-EFFECTIVE CHARITABLE GIVING Charitable remainder trust What is it? An irrevocable trust that generates a potential income stream for clients or their beneficiaries, with the remainder of the trust assets going to one or more charities. Two Kinds: Unitrust: Payments are a fixed percentage of trust value each year Annuity Trust: Payments are a fixed dollar amount Make a contribution How does it work? 1 Charity 1 Charitable Remainder Trust Individual 2 Partial Tax Deduction & Income Stream 3 Charity 2 Remainder Amount Charity 3 Who’s a good candidate? Clients who want an immediate charitable deduction but also have a need for an income stream to themselves or another person. Also a good option for clients who want to provide for theirs, with the remainder going to charities of their choosing. 23 FOR ADVISOR USE ONLY
TAX-EFFECTIVE CHARITABLE GIVING Charitable Remainder Trusts as a Beneficiary Annual (or more frequent) payments for life or term of years Warning: Charitable intent required Child 2 IRA Donor (income beneficiary) Charitable Remainder Trust 1 3 No tax is paid when the IRA is distributed to the CRT At the end of trust term, the charity receives the residual assets Charity (remainder beneficiary) 31 FOR ADVISOR USE ONLY
TAX-EFFECTIVE CHARITABLE GIVING Charitable Remainder Trusts as a Beneficiary 34 FOR ADVISOR USE ONLY
TAX-EFFECTIVE CHARITABLE GIVING Charitable Tax Strategies 1. Bunching/accelerating deductions 2. Asset Selection for Charitable Giving 3. Offsetting a Roth conversions with giving 4. Qualified Charitable Distributions 5. Utilizing a Testamentary CRT to Replicate Stretch IRA 6. Testamentary gifts 35 FOR ADVISOR USE ONLY
TAX-EFFECTIVE CHARITABLE GIVING Charitable tax incentives Estate taxes • Federal estate tax exemption raised to $11. 7 million 1 • Highest taxable rate is 40%2 • Unlimited deduction for charitable contributions Charitable gifts made during a client’s lifetime removes the assets from (and any future appreciation related to) their estate 1 Adjusted 22021 annually for inflation tax rate 36 FOR ADVISOR USE ONLY
TAX-EFFECTIVE CHARITABLE GIVING Gifts from Trusts/Estates and the Income Tax Deduction 37
TAX-EFFECTIVE CHARITABLE GIVING Gifts from Trusts / Estates Qualifying for the Income Tax Deduction • Gifts must be made from the “gross income” of the trust or estate to qualify for the income tax deduction. • Very problematic for gifts to charity that will be fulfilled with items of income in respect of a decedent (IRD), e. g. IRAs. IRC § 642(c) 38 FOR ADVISOR USE ONLY
TAX-EFFECTIVE CHARITABLE GIVING FIDELITY CHARITABLE Gifts from Trusts / Estates Qualifying for the Income Tax Deduction Whether the income recognized, due to any IRA distributions, can be offset with a charitable deduction depends on the language in the Will: • The contribution might be deductible if the will provides that charitable contributions are to be made from income. • If the will does not have such a provision, the contribution is not deductible. WHEN POSSIBLE, “ASSIGN” THE IRA TO CHARITY. IRC § 642(c) 39 FOR ADVISOR USE ONLY
TAX-EFFECTIVE CHARITABLE GIVING Gifts from Trusts / Estates Qualifying for the Income Tax Deduction The simple and safe solution is to name the charity as the direct IRA beneficiary because then the value of the IRA isn't taxable income to the estate so there isn't any need for a 642(c) deduction. • • If a Will has the “magic language, ” 100% of her IRA will pass to charity. If a Will does not have the “magic language, ” approximately 40% of the IRA will be lost to income taxation. IRC § 642(c) 40 FOR ADVISOR USE ONLY
TAX-EFFECTIVE CHARITABLE GIVING Testamentary gifts & the estate tax deduction 41
TAX-EFFECTIVE CHARITABLE GIVING Estate Taxation & Charity Overview Allows a deduction against the gross estate for charitable bequests, legacies, devises, or transfers. • Does not contain any sort of percentage limitations. • Organizations that can receive contributions deductible under § 2055 are very similar, but not exactly the same as under § 170. • Potential tax benefit of an inter vivos gift which qualifies for the § 170 deduction: • $1 x 37% = 37¢ income tax savings $1 x 40% = 40¢ estate tax savings <37¢ x 40% = 14. 8¢ estate tax on income tax savings> 62. 2¢ tax savings per $1 donated IRC § 2055 42 FOR ADVISOR USE ONLY
- Slides: 31