Year-end giving allows you to positively impact the greater good by helping charities in need, while reducing your 2016 tax liability. During a new conference call with clients, John O. McManus shares important advice on how to give now to capture the greatest income tax deductions, and he identifies tax-efficient estate planning vehicles to consider for your ongoing philanthropic mission.
“The result of this year’s election makes taking advantage of deductions in 2016 even more urgent and more important,” explained McManus. “Income tax rates will likely go down in 2017, reducing the value of deductions. Because tax deductions are more impactful when tax rates are higher, consider making your charitable gifts for 2017 before the end of 2016.”
How to Maximize 2016 Year-End Giving
- Put away your checkbook and credit card
Use appreciated stock to get an extra tax break. Specifically, consider gifting low-basis stock, instead of selling the stock to raise cash for gifting that could lead to gains. You will receive a charitable deduction for the fair market value of the stock with the benefit of no capital gains tax on the appreciation. The full value of the asset is deductible, but is limited to 30% of the donor’s adjusted gross income for the year. Any remainder can be carried forward for up to five years.
- Let your IRA do your charitable giving
In 2015, legislation made permanent the use of qualified charitable distributions (the law did not have to be renewed). If you are over 70 ½ and are receiving a required minimum distribution from your IRA, you can elect to have all or part of the distribution (up to a maximum of $100,000) sent directly to a charity of your choice; the withdrawal will not be taxable and the minimum distribution requirement will be met. Distributions must go to a public charity; therefore, donations cannot be made to a private foundation or a donor-advised fund.
- Itemize to get a charitable deduction
You should load up your deductions now since the deductions may be worth less next year if individual tax rates are reduced. Also, according to his revised tax plan, President-Elect Trump would increase the standard deduction to $15,000 for individuals and $30,000 for married couples.
For now, in 2016, the standard deduction remains at $6,300 for a single individual and $12,600 for married couples without itemizing. Therefore, if all of your itemized deductions, such as mortgage interest, real estate taxes and charitable contributions exceed your relevant amount, rather than taking the standard deduction, you should report and itemize these deductions on your tax return in order to decrease your taxable income.
- Receipts, receipts, receipts
A donor cannot claim a tax deduction for any contribution of cash, a check or other monetary gift unless the donor maintains a record of the contribution in the form of either a bank record (such as a cancelled check, credit card statement, or W-2 for charitable contributions through your employer) or a written communication from the charity (such as a receipt or letter) showing the name of the charity, the date of the contribution and the amount of the contribution. If a donor makes a single contribution of $250 or more, the charity must also include a statement to the effect that the charity did not provide goods or services in whole or partial consideration for any contributions made to the organization. Each amount of $250 or more is treated as a separate contribution for purposes of the $250 threshold requirement for written acknowledgments. Churches and temples provide these receipts regularly.
- Noncash gift? Additional reporting
You must file IRS Form 8283 “Noncash Charitable Contributions” if the amount of all noncash contributions is greater than $500. Donations of property valued at $5,000 or greater (excluding publicly traded securities) require a written appraisal by a qualified, licensed appraiser.
Philanthropic Strategies for 2017 and Beyond
There are several strategies that can be utilized to help you implement your philanthropic mission. While you can make gifts that solely benefit charities, you can also make gifts that provide you with financial benefits. Both offer the opportunity for immediate and deferred gifting.
- Set up a Family Foundation
Rather than making gifts directly to charities and surrendering any say as to the application of the gifts thereafter, a Foundation allows you to retain control over the administration and investment of the assets that you have earmarked for future grant-making, while enjoying the full benefit immediately of a charitable income tax deduction – up to 30% of your adjusted gross income for cash gifts and 20% for gifts of appreciated stock. By making gifts to charities in increments over time, you and your family can maximize your influence over their ongoing use to the selected charities.
Presently, your estate would benefit from an estate tax deduction equal to the fair market value of any assets passing to the Foundation at your death. However, under President-Elect Trump’s tax proposal, contributions of appreciated assets to a private foundation established by the decedent or the decedent’s relative would be disallowed.
- Create a Charitable Remainder Trust (CRT)
Charitable remainder trusts are irrevocable trusts that provide for two classes of beneficiaries: (i) the income beneficiary who receives a fixed percentage of income for the CRT term, which could be a specified number of years (up to 20) or the remainder of your lifetime, and thereafter (ii) the designated charity or family foundation, to which the remaining assets of the CRT go after the term is completed.
Due to the fact that a gift of the remainder interest in the CRT is given to a tax-exempt, not-for-profit organization, you would qualify for an income tax deduction for the initial contribution to the CRT. The amount of the current income tax deduction is based on the present value of the remainder interest to the charity and is limited to 20% of your adjusted gross income. Any part of the deduction not deployed for the year of the gift to the CRT (for example, if your income is less than the deduction) may be carried forward as an income tax deduction in the succeeding four years.
- Consider a Charitable Lead Trust
Charitable Lead Trusts (CLTs) are irrevocable, split-interest trusts in which income payments are made to a qualified charity, while the remaining trust corpus is given to a noncharitable beneficiary, generally the spouse or children of the donor. The assets are permanently excluded from your estate for estate tax purposes. When the trust terminates, the assets remaining are passed to the designated beneficiaries free of estate and gift tax. For those with a strong interest in making charitable donations, CLTs provide a means to make donations to charities without completely disinheriting children or a spouse.
The low interest rate environment today reduces the required annual charitable donation and increases the probability of greater assets transferring to the beneficiaries. The challenge is to manage the assets so that they generate the necessary payments for the charity, while at the same time providing growth that will pass to your family.
- Contribute to a Donor-Advised Fund
A donor-advised fund is a separately identified fund that is maintained and operated by a section 501(c)(3) organization, which is called a sponsoring organization. Each fund is composed of contributions made by individual donors. Once the donor makes the contribution, the organization has legal control over it. However, the donor retains advisory privileges with respect to the distribution of funds and the investment of assets in the account.
Donors receive a tax deduction when they make a charitable contribution to a donor-advised fund. Deductions can be taken up to 50% of adjusted gross income (AGI) for gifts of cash and up to 30% of AGI for gifts of appreciated securities (with a 5-year carryforward for unused amounts above this AGI limit).
Before the calendar turns to 2017, call McManus & Associates at 908-898-0100 for trusted advice on how to attain the greatest charitable income tax deduction through philanthropic giving.