As the winter holiday season ramps up,
non-profits and charities are attempting to meet their year-end fundraising
goals, but as the coronavirus crisis continues, these organizations will likely
need more resources than they have in previous years. If you are an investor
who is in a fortunate enough position to give, now may be a good time to
consider ways you can financially assist charities (or family members).
There are several upsides to
charitable and intra-family gift-giving, not the least of which will help you
increase your tax savings. We offer some tips for minimizing your 2020 tax
burden through estate planning, gifts to your family, or significant donations
to the charity of your choice.
Gift Incentives Under the CARES Act Can
Help Investors Offset Tax Burdens
This year is an especially good one to
give generously, because investors may be able to offset their entire 2020 tax
bill based on rules under the CARES Act, which provides several incentives for doing so. There are no
income limits on tax deductions for cash gifts to eligible public charities,
and, for investors who make contributions to donor-advised funds, deductions
can be made for up to 60 percent of adjusted gross income. If you have capital
gains taxes to pay from the sale of securities or real estate, or you have
income taxes to pay on a Roth IRA conversion, a generous gift to a charity or
non-profit can help you offset much, or all, of that burden.
Qualified Charitable Distributions
If you are unsure about what is
considered a qualified or eligible charity, think about
organizations that are granted tax-exempt, or 501(c)(3) status by the IRS.
Non-profit organizations and charities like the United Way, the Salvation Army,
or Goodwill would fall under this category as would mosques, churches,
synagogues and other religious organizations. Public parks and recreation
facilities are also eligible.
The CARES Act
waived the Required Minimum Distribution (RMD) requirement for 2020, but if you
are 70½ or older and would still like to take the distribution to make a Qualified Charitable Distribution (QCD), you should do so. QCDs can be
counted toward satisfying your RMD, and when you give the amount a to qualified
charity instead of using it, that amount is excluded from your taxable income. As
long as you make the payment directly from your IRA account to the designated
charity or organization, you can exclude up to $100,000 from your taxable
income.
Mike Gavett, a B.
Riley Wealth Management financial advisor in Dallas, says he likes to discuss
QCDs with clients and encourages them to make charitable gifts using their
RMDs. "The charity gets the full value of the gift, including where the client
would have paid taxes. The client does not have a tax bill for the portion
gifted, which is, of course, a good way to offset capital gains or income taxes."
Donor Advised Funds
Some investors choose to give to
organizations through donor advised funds (DAFs), which are analogous to
investment accounts, except they are used for charities. These types of funds
are normally part of public charities, which are 501 (c)(3) organizations
that actively engage in fundraising. Schools, universities and religious
organizations would fall under this category as opposed to private foundations,
which, while 501(c)(3)s, are not considered public because they are usually
supported through one large source, like a gift bequeathed by a family.
Giving to donor advised funds allows
investors to make donations from large non-cash assets like stocks,
cryptocurrency or other sources, and take an immediate tax deduction the year
the gift is made. The difference between simply giving cash to a public charity
in a lump sum, as opposed to placing money in a donor advised fund, is that
while a gift placed in a DAF comes out of your tax bill immediately, you have
several years to determine your allocation strategy as your account accrues, creating
an opportunity to grow the account before donating to the charity (or charities)
of your choosing.
Gifts to Family Members and the Estate
Tax Exemption
Investors have multiple options for gifts to family members, and
for high net worth individuals, the Tax Cuts and Jobs Act (TCJA) allows for sizable gifts to be
made to spouses or children. Until the exemption expires in 2026, the lifetime
gift and estate tax exemptions are set at $11.58 million. This is significant,
because when estates are transferred after the death of a spouse or family
member, they are normally subject to a 40 percent tax after the transfer of the
first $5 million. Now, estate transfers are tax-free for an amount of up to
$11.5 million, and double that amount for married couples.
The standard annual gift tax exemption remains at $15,000 per
year, per individual, and married couples can use a gift-splitting election to
give a total of $30,000 for the year, keeping the gifting exemption at $15,000
each.
Give the Gift of an Education
Some investors may want to give their
children or grandchildren the gift of a college or private school education. One major advantage of this is that
five years' worth of gifts can be made in one year by opening a 529 plan
account and "superfunding" it. Normally, investors are permitted to gift
$15,000 per year to a family member, but if they choose to purchase a 529 plan,
they can place up to $75,000 in the account at one time, and double that
amount, $150,000, they are married. As the original account holder, that
investor would also own the plan, which means that if plans changed,
adjustments to beneficiaries could be made, as well. If one child in a family
received a scholarship or decided to forgo college entirely, the beneficiary could
be changed so another child could receive the gift.
Just like 401(k) plans, 529 plans accumulate
on a tax deferred basis and earnings are tax free, as long as those funds are
used to pay for qualified educational expenses like tuition, room and board.
Using the account for other expenses will result in a 10 percent penalty and
federal income tax upon withdrawal. It's also worth noting that the Tax Cuts
and Jobs Act now allows for the use of 529 plans to fund elementary through
high school (K-12) tuition expenses as well.
Another
consideration for 529 plans is a welcome, though unintended, consequence:
removal of assets from your estate, which therefore, cannot be taxed. Since 529
account contributions are treated as completed gifts by the IRS, contributions
to 529 accounts have the effect of reducing your estate by the amount gifted,
which can ultimately save you up to $350,000.
Gavett
adds, "From an estate planning standpoint, we advise clients on the power of
529 planning for the removal of assets from their estates, given that parents
or grandparents can accelerate gifting (up to $75K per individual) in the first
of a five year period. There are caveats to this, of course, but it can be
an effective tool for overall reduction of one's tax burden."
Conclusion
Depending on your financial status, there are
several creative ways to engage in charitable giving this year and into the
future. If you have questions about charitable gifts, we encourage you to meet
with your financial advisor or reach out to B. Riley Wealth Management.
B. Riley Wealth Management does not
provide tax or legal advice. Please consult with your tax and/or legal advisors
before taking any action that may have tax and/or legal consequences.