By Scott Keffer
With the holidays approaching, it’s never too early to begin shopping. But, where do you find the best gifts? My wife and I just went through one of those huge superstores. You know the ones I mean. They’re filled with all sorts of stuff, but you can never find what you’re looking for. And there’s never anyone around to help. I spot the person who looks like they work there, but invariably, they are fellow seekers, confused and bewildered like me.
So maybe I can help, as you go shopping for the best gifts, that is, the best charitable gifts, after the Taxpayer Relief Act of 1997. One caveat: this is generally for gifts to public charities.
When the topic of charitable giving comes up, many people only think about one type of giving: cash. There are so many other opportunities we want to explore, but what about cash? The federal tax on ordinary income and the limits on use of charitable deductions have not changed. The income tax charitable deduction can not exceed 50 percent of your adjusted gross income. Gifts in excess of the 50 percent limitation can be carried over and deducted for up to five years.
Although capital gains tax rates and holding periods have changed, gifts of appreciated property are still very attractive. Rates have effectively been reduced to 20 percent and the holding period to qualify for capital gains instead of ordinary income is 12 months. However, there is no change in the fact that gifts of appreciated property held over 12 months still avoid the capital gains tax. Zero is still better than 20 percent. The income tax deduction, valued at the full fair market value, cannot exceed 30 percent of your adjusted gross income.
If you are considering a year-end charitable gift of cash, consider using appreciated stock instead. The more highly appreciated, the greater the benefit. No capital gains taxes are due. Then, use the cash to purchase equivalent replacement shares, thus maintaining your stock position. Instead, the new shares will have a higher cost basis, reducing future capital gains taxes.
Conversely, gifting of stock to heirs should be made with shares with the highest cost, since the cost basis would carry over to the recipient of the gift.
Do you have property with a relatively small gain? Consider its impact and elect to deduct only your cost basis. Doing so will qualify the gift for the higher 50 percent limitation. If you make this election, keep in mind that it must be made for all gifts of appreciated property made that year. This is still a good alternative to cash giving.
Contributions of qualified appreciated, publicly traded stock to a private foundation enjoyed a fair market value deduction up through June 30, 1998. The deduction for contributions after that date is limited to your cost basis. Stay tuned; this is expected to change. So hold up on any contributions that fall into this category.
Do you have any art, collectibles, collections, antiques, etc. that one of your favorite charities can use? You can make gifts of this kind of appreciated personal property. If the property cannot be used by the charity for its mission, your deduction is limited to your cost basis.
Want an income tax deduction today for a gift of your home after you’re gone? Try a Life Estate. You can enter into an arrangement today, to give your house to a specific charity at death. If you do, you are still able to live in it until death, and yet receive an income tax deduction today. Let’s look at an example: Bob and Sue, both 75, decide they want to give their home, valued at $250,000, to their favorite charity after they’re gone. Using a Life Estate agreement, they could both live in the home for the rest of their lives, and the IRS would give them a current income tax deduction of $106,000.
A donation to a charity in excess of $10,000 is now exempt from gift tax reporting requirements, if the property given is your entire interest in the property.
How would you like to make a gift, yet still retain the income from it for your life, and your spouse’s life if you desire? How about an income tax deduction today for a gift that occurs after your passing? You’ve probably heard or read about the charitable remainder unitrust. Highly appreciated property is transferred into a trust in return for a lifetime income—either a fixed dollar amount or a fixed percentage. The IRS will give you an income tax deduction today and your favorite charity will receive the balance after your passing. While living, you can manage the assets in the trust free of income and capital gains taxes. At death, there are no estate taxes. The 1997 tax act made this concept a little more difficult for individuals under age 40, so check with a specialist when designing one of these.
You can also gift appreciated property to a charity in exchange for a relatively high guaranteed lifetime income. A portion of the income will be tax exempt and you’ll receive a current income tax deduction.
What about a gift of life insurance? You may have an older insurance policy you no longer need because of changing circumstances. Consider gifting it to your favorite charity. Since life insurance is not considered a capital gain asset for tax purposes, your deduction is limited by the higher 50 percent of adjusted gross income. Any ongoing premiums paid by you to the charity are fully deductible.
Gift appreciated property to the charity, with the understanding that the proceeds will be used to pay the premiums.
Your retirement plan, when transferred to children, can be taxed twice: once for estate taxes (amounts over $625,000 in 1998) and once for income taxes (income in respect of decedent tax). These taxes can confiscate up to 75 percent, resulting in less than 30 cents of every dollar in your retirement plan going to your children. This is a great asset to leave to charity. If you’d like to leave an income stream to your children, you can arrange to leave your plan to a charitable remainder unitrust. The income could be paid to your children for a term of up to 20 years, and the balance left to your favorite charity—even a family-controlled charitable entity!
Well, that’s a few of your choices in the charitable gift area. There are others, so check with your favorite charity. I hope this stimulates your thinking and your holiday spirit. Remember, it is more blessed to give than it is to receive. And the tax and financial benefits are just icing on the cake. Happy shopping and happy holidays!
Scott Keffer is president and founder of Wealth Transfer Solutions, Inc., a legacy planning company in Pittsburgh.