2017 is a great time to take advantage of current IRS allowable tax deductions. One my favorites is donating stocks or bonds directly to a worthwhile charity or nonprofit. You can take the deduction for the current value of the stock and pay no taxes on the gain that creates sort of a double deduction.
Long-term family goals, needs and your financial situation would of course need consideration.
Current tax bill legislation will most likely create less reward for charitable deductions and lower tax liability in 2018.
Any deduction you can take in 2017 will create greater tax savings than waiting for a later time. You will save more money and have the satisfaction of your money going farther.
We say “incentives” because there are federal and state income tax deductions for charitable donations.
As we approach the end of 2017, there are major federal tax changes on the table but there appears to be little prospect that the charitable donation deduction will be reduced for 2017 gifts.
In general, maximizing itemized deductions in 2017 will be good for many taxpayers because the repeal or cut-back of many types of itemized deductions after the year is very much a possibility.
The House and Senate versions of proposed tax legislation as of this writing contemplate no repeal of the charitable contribution deduction, and both versions increase from 50% to 60% of adjusted gross income the limit on charitable contributions for cash gifts. Both versions would repeal the Pease limitation, the overall limitation on itemized deductions that applies to high-income taxpayers.
The 50% to 60% rule wouldn’t apply to the gifts-of-listed-stock concept we discuss, and repeal of the overall limitation on itemized deductions may also be a post-2017 change, if enacted.
We emphasize gifts of long-term capital gain property, and the usual limit in that case is 30% of adjusted gross income, with further limitations on gifts of long-term capital gain property to private foundations. ((See “Charitable Contributions,” IRS Pub. 529 for use in preparing 2016 returns, p. 14.))
Overall itemized deduction limitation calculations may be part of the year-end planning analysis of your tax adviser.
Tax projections for the year and later are generally a good idea when one is planning major charitable transfers. A sit-down with your CPA with year-to-date figures and your prior two or three returns is a good idea if you’re contemplating a major charitable gift. Bring to such a meeting any major changes or transactions; e.g., moving from California to a no-income-tax state may suggest making any major gifts prior to leaving the state.
Carryovers, deductions beyond the federal or state limits, can be particularly important to projections if you’re contemplating a major change such as leaving the state.
No one knows effective dates for any final tax bill affecting 2017 and later, but we note a significant aspect of both the House and Senate versions of tax changes would basically double the standard deduction, which is in lieu of itemized deductions. If this should be enacted as effective in in 2017, it would increase the range where charitable donations may yield no added tax savings. Unlike the House bill, the Senate version also keeps the current law provision helping the blind and elderly.
In general, many taxpayers will shift away from itemizing if proposed legislation is enacted to increase the standard deduction. If one had to make a best guess at the time of this writing, the prospects don’t appear high that there will be an increased standard deduction enacted for 2017 although it is possible.
While making major charitable donations can be easy, we admit that your tax adviser’s analysis of your year-end planning options is a bit complicated particularly given the admixture of proposed tax changes.
In general, for many taxpayers, 2017 is likely a good year for incremental charitable donations.
Charitable deductions can also save alternative minimum tax, which is expected to be with us in 2017, although both the House and Senate versions of tax proposals repeal the AMT.
Donating in 2017 – The Estate Tax Perspective
The advantage of foregoing charitable dispositions during one’s lifetime is preservation of assets for family needs. But holding assets beyond one’s lifetime foregoes the benefit of lifetime charitable donation deductions.
There are exceptions, but the general rule is that appreciated property steps up in income tax basis to fair market value at death. So if the asset has appreciated, there is often less of an income tax issue with the sale of inherited property by your heirs. As of this writing, both the House and Senate proposals keep the general rule that heirs take on not carryover basis but basis focused on fair market value at death.
If the estate tax is repealed, this would also trigger a review of testamentary charitable dispositions that presumed major savings in estate tax. It is not uncommon in mega-estates to have huge charitable donations because such transfers, if going to family, would trigger a large estate tax. The estate tax charitable deduction, unlike the income tax deduction, is unlimited.
Writing in late 2017, the proposals in both houses of Congress basically double the exclusion from estate tax (and gift tax and generation-skipping tax), and one of the proposals would eventually repeal the estate and generation-skipping taxes. If either proposal is enacted, estate tax incentives for charitable gifts will less of a factor for wealthy taxpayers.
Estate taxes are rarely the major motive for charitable gifts but they can be a factor. When they are a factor, they’re usually a major factor.
The selection of assets for testamentary disposition should also be reviewed with your tax advisor. It is sometimes good to give to charity pension/401(k) distributions that would otherwise be subject to income tax. Unpaid wages and pension/401(k) distributions are taxable to the beneficiary. “Income in respect of a decedent” is the tax parlance. Such income is not subject to the general rule that the asset takes on basis focused on value at death. In some relatively rare cases, it is also possible that inherited assets that are not income in respect of a decedent have an income tax basis focused on an alternate valuation date, rather than value at death.
What to Give? Consider Publicly-Traded Stocks
In general, most charitable disposition decisions can be postponed until relatively late in the year, even if there are property dispositions to charity, not just year-end checks. But there are exceptions. If you are considering a private foundation or charitable remainder trust, it is best to begin such deliberations well in advance of year-end.
Charitable donations made by check must be in the hands of the Post Office by December 31st to be deductible in 2017. Proof of mailing receipts for last-minute gifts can help prove the gift was made in 2017
Year-end donations of publicly traded stock require earlier action but they are still relatively easy and painless, with the cooperation of your stockbroker. The basic goal is to get ownership of the stock certificates transferred to the charity by year-end. Your broker can show you how this is accomplished. We discuss this in a little more detail later.
The tax rules provide an incentive for charitable gifts of publicly-traded stock to charities when the stock has been held more than one year, and the stock has appreciated over its cost, or carryover basis if received by lifetime gift or fair market value at death if inherited.
The measure of the charitable deduction for assets held more than one year is usually fair market value, not cost or other basis. To be specific, the deduction is the average of the high and low on the day credited to the charity’s account. Also, the gain inherent in the stock goes unrecognized permanently because there are no proceeds prior to the tax-exempt charity’s ownership.
The donation of the stock avoids the capital gains tax, if you would incur a capital gains tax. Long-term capital gains may be taxed at rates ranging from zero to 20%, depending on the math that considers the gain and your other income. Depending on your particular incremental tax rate and circumstances, a donation of stock can also avoid the 3.8% Medicare tax, as well as any incremental state income tax.
There are a number of possible incentives to donating publicly traded stock, rather than selling such stock.
We do stress the math turns on your particular circumstances. It is unfair to just presume the donation saves the maximum in taxes – 20% capital gains tax plus 3.8% Medicare tax plus state income tax. The long-term capital gains rate is usually 15%.
We said making major charitable gifts is easy but we caveat that the tax adviser’s math isn’t always easy.
The donation rather than sale of the stock will also generally affect the adjusted gross income on your return, which can have any number of side effects, such as affecting other itemized deductions in 2017.
Among the complexities to discuss with your broker is choice of shares if there are different lots purchased at different prices. Generally, donate the securities with the most appreciation because this avoids the most tax.
If a stock certificate represents a particular number of shares, it is also possible to donate less than all the shares. Your broker can handle these details also.
The same benefits we discuss – maximizing the charitable donation with appreciated long-term stock – can be achieved with publicly-traded bonds or mutual funds.
The Basic Idea Isn’t Complicated – Share!
One wants to understand the tax perspective before making a major charitable gift, but the basic concept is share – share the shares if you you’re giving appreciated stock, which is generally more advantageous than giving cash.
Then the basic question is where to share? At the risk of repetition, we also recommend a California organization – Share!; technically, the name is Emotional Health Association, 95-6092809, for purposes of checks and transfers of stock certificates.
Their mailing address and main location is Share! Downtown, 425 South Broadway, Los Angeles, CA 90013; (213) 213-0100. You can also visit them at 6666 Green Valley Circle, Culver City, CA 90230; (310) 305-8878. Their web site is http://shareselfhelp.org.
If you care to designate your gift be used exclusively for their counseling and self-help programs, you can so designate, or you can also designate the gift be used exclusively for their housing program. Most donors leave the allocation among programs to the charity but Share! will respect your desires. The author works with this worthwhile group, serving currently as the organization’s Treasurer.
Effecting the Gift of Stock
Giving appreciated securities is a tax-savvy way to support the wonderful work of Share!.
As we indicated, the broker usually can readily and quickly handle the transfer of the shares to charity, but it may be best to contact the charity.
To make a gift of securities or mutual funds you can contact the charity with the following information: name of the stock; number of shares; designation of the gift; broker’s name and phone number.
The charity, including Share!, will work with you and your broker to complete the gift.
If the securities are held in your name rather than being held by the broker, you can work with your broker or get the following to the charity: unsigned certificates; a letter stating what is being given and the charitable designation; and a copy of the letter with an endorsed stock power, signed but left blank (charity or broker will fill it in).
Gifts of Real Estate
We’re not going to discuss the details of gifts of real estate but note that charitable gifts of appreciated realty can be advantageous and accomplished without great complication, particularly if the realty is debt free and doesn’t have a history of passive loss carryovers.
A key to such gifts is that there needs to be a clear gift prior to the sale, and the charity needs to control the sale.
If the donor has basically negotiated the sale and decides at the last minute to give the proceeds to charity, it is usually too late to avoid the gain being taxable in the donor’s tax return. A key to real estate gifts is that the charity needs to get the gift and then it would negotiate the disposition. This generally yields a tax deduction of fair market value at the time of the gift even though the donor doesn’t recognize the gain in taxable income.
But real estate can involve myriad fact patterns and complications that may need review, particularly if there is debt.
Share! helps people but also houses them, so you could anticipate that your real estate would be used for a worthwhile purpose. They look for realty that can be used in their important work as well as gifts of realty that can be sold.
Other Major Gifts
Another important approach to charitable commitment is the private foundation, a somewhat complicated vehicle for achieving one’s charitable goals. The basic idea is the donor, and usually the donor’s family, are involved in a charity they created. The private foundation is usually funded significantly up-front, although on-going gifts are also often contemplated. The entity (the charity) has to be created, file returns, get IRS approval, etc. It is typically a charity funded to make grants to other charities, usually public charities. The rules here are much more complicated and restrictive, but we also note that it is generally possible to fund a private foundation advantageously with publicly traded stock. See generally the author’s article, “The Private Foundation as a Charitable Lifestyle,” May 6, 2017; rojascpa.com. The private foundation is wholly charitable.
The charitable remainder trust is only partially charitable. ((Sec. 664.)) It generally pays the donor or family a fixed amount or a percentage of value annually. The charity’s interest is usually limited to the assets in the trust upon termination of the family’s interests paid over a term of years or lives. There is usually a transfer of appreciated assets, such as publicly traded stock, to a CRT. The trust can sell the donated asset without tax because the CRT is usually tax exempt. The CRT has its advantages and is a major type of partial gift. It also yields a partial charitable deduction measured by the actuarial value of the charity’s remainder interest. The author’s firm has a National Tax Director known for charitable planning. He was guest editor of the Arthur Andersen publication on charitable planning, and he published for years a treatise and newsletter on charitable remainder trusts.
Major charitable gifts can involve different types of donated assets and may also involve the creation of an entity whose purpose is in whole or significant part charitable, such as the private foundation or charitable remainder trust.
A major incentive to charitable donations is the rule that looks to the fair market value of appreciated long-term stock in measuring the charitable donation, a rule that looks to survive in the current legislative proposals.
The advantages of donations of listed public stocks also play a major role in gifts to private foundations or charitable remainder trusts.
Those advantages also generally apply when appreciated listed stocks are donated to an account at a donor advised fund. The donor advised fund is basically a charity which permits you to donate now, dole out later. They charge some fee for having an account at the DAF. Your account at a DAF represents assets held by a charity on their way to an operating charity.
Closing Thought – Share Often
Cultivate the habit of regularly reviewing the topic of major charitable gifts, especially gifts of appreciated, long-term shares of listed companies.
Feel free to call Rojas & Associates, CPAs, rojascpa.com, if we can help you with your charitable planning. Our work extends to individual and corporate planning, philanthropy and exempt organization issues, including audits of private foundations.
Our heart for charitable endeavors extends in many different directions, but as you can tell, the author and his wife have a special heart for the charity whose name reflects our theme – Share!.