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The Best Assets to Donate to Charitable Organizations

by Kara Kessinger, CPA/PFS®, MTAX

When donating to a charity, you may ask yourself: should I give cash, appreciated securities or make a Qualified Charitable Distribution (“QCD”). The ideal assets to donate to charity are the ones that best fit your individual situation. Writing a check is certainly the easiest way to make a charitable contribution, but it isn’t the most tax-efficient since you are gifting after-tax dollars. However, gifts of cash can be deducted up to 60% of your Adjusted Gross Income (“AGI”).

Let’s explore three alternative assets to donate to charity that are more efficient than donating cash.

Appreciated Securities

If you have owned appreciated securities for a year or more, you can deduct the full market value of the securities on the day you make the charitable contribution. For example, if you bought stock ten years ago for $5,000, and now, when it’s worth $25,000, you donate it to a charitable organization, you are allowed to deduct the full $25,000 and avoid the long-term capital gains tax on the $20,000 profit. The $20,000 is a pre-tax deduction while the $5,000 of basis is an after-tax deduction.

The tax liability that you are giving away is based on your long-term capital gains rate. Your rate can be as low as 0%, or could be either 15% or 20%. The rates are dependent on your marital status and your taxable income. You may also be subject to the 3.8% net investment income tax.

A deduction for gifts of appreciated securities is generally limited to 30% of AGI when the gift is made to qualified charitable organizations. As an example, if your AGI is $100,000, a gift of securities with a fair market value of $30,000 or less is deductible. If you make a gift to a private foundation, the deduction is limited to 20% of AGI.

Qualified Charitable Distributions from Your IRA

If you are charitably inclined, a Qualified Charitable Distribution is another tax-efficient way to make charitable gifts provided you are age 70 ½ or older. A QCD allows you to transfer up to $100,000 per year from your IRA directly to a charitable organization while also satisfying your Required Minimum Distribution (“RMD”).

With a QCD, you don’t have to itemize income tax deductions to receive a tax benefit for your charitable contribution. The amount of your QCD is excluded from your gross income, meaning you will pay less tax. You end up with a 100% pre-tax charitable deduction with a tax savings between 10% and 37%, depending on your filing status and your top marginal rate. An added feature of QCDs is that they aren’t subject to the AGI limitations nor are they counted for purposes of the 60%, 30%, or 20% AGI limitations mentioned above.

The SECURE Act (see our January 2020 blog) states that if you turn 70 ½ in 2020, your RMDs will not be required until you turn 72. However, you can still make a QCD at 70 ½ even though you aren’t required to take RMDs. Taxpayers who turned 70 ½ prior to January 1, 2020 must continue to take distributions under the previous law.

The QCD is popular with retirees who plan to make charitable donations and don’t need the money from their RMDs. There are several benefits of excluding the QCD amount from your income.

First, given the recent tax legislation, 70% of taxpayers don’t itemize deductions by virtue of an increased standard deduction and the $10,000 limitation on deductible taxes (e.g. state and local income taxes and real estate and personal property taxes). When your gross income decreases by a QCD, you end up getting the tax benefit of a charitable deduction whether or not you itemize deductions.

Second, as a result of the QCD, your Adjusted Gross Income decreases. A lower AGI can result in less Social Security Income being taxed. You’ll also have less income to trigger the 3.8% surtax on net investment income. In contrast, a higher AGI can lead to higher Medicare premiums or lower the itemized deductions that are tied to AGI. For example, medical expenses are deductible to the extent they exceed 10% of AGI in 2020. Also higher income may reduce your eligibility for certain tax credits.

Maximizing Your Tax Savings with Charitable Gifts

The best way to limit the income taxes you pay while keeping 100% of your IRA money in your pocket on an after-tax basis is to take a taxable IRA distribution and make an offsetting charitable donation of appreciated securities. In general, this strategy works for anyone age 59 ½ and older. The best results occur when AGI limitations on the charitable deduction are not a factor, and your itemized deductions exceed your standard deduction.

As an example, assume your RMD is $50,000 and you donate $50,000 of low basis securities. From a tax standpoint, the deduction for the $50,000 stock donation negates the tax on the $50,000 IRA distribution. You are left with the $50,000 IRA distribution on which you didn’t have to pay income taxes, plus you gave away your capital gains tax on the appreciated securities. In essence, you have neutralized the income tax impact of taking an IRA distribution while also eliminating potential capital gains tax.

If you’re charitably inclined, there may be a way to maximize tax benefits through various gifting strategies. Our Wealth and Tax Advisors can navigate the complexities of your unique circumstances and help determine which type of charitable donation will result in the largest overall savings to you.

Kara works closely with other team members to provide seamless tax and compliance services to our clients. She has extensive experience in legacy and business succession planning, qualified and non-qualified stock options, restricted stock units and qualified and non-qualified retirement plans, as well as  education and retirement planning, and income tax compliance for U.S. citizens working abroad and non-U.S. citizens living and working in the United States.

How Will the SECURE Act Impact Your Retirement Planning?

by Westray Veasey, J.D.

The Setting Every Community Up for Retirement Enhancement Act (the “SECURE Act”), enacted on December 20, 2019, is landmark legislation containing a number of provisions that will affect most clients’ retirement planning. Here is a look at some of the more important elements of the Act that impact individuals.

With Congress concerned that we are not saving enough for retirement and recognizing that people are working later in life, the SECURE Act lifts the prohibition on contributing to a traditional IRA after the year an individual reaches age 70 ½. (There are no age limits on contributions to 401(k) plans or ROTH IRAs.) Beginning in 2020, individuals of any age can contribute earned income to a traditional IRA. This change allows people working past age 70 ½ an additional way to save for retirement and to potentially further reduce their taxable income, Medicare premiums, and taxation of their social security.

In addition, the Act pushed back the starting age for required minimum distributions (“RMDs”) from age 70 ½ to age 72. For individuals who turn age 70 ½ in or after 2020, their required beginning date for RMDs is April 1 of the year following the year they turn age 72. (If you turned age 70 ½ in 2019, you are under the old rules and must take an RMD by April 1, 2020.) Be aware, as under the prior law, if you push your first RMD to April 1 of the following year, you will have two RMDs for that year, as the following year’s RMD will also be due by year end. Clients who are not relying on their IRAs for living expenses can take advantage of the tax deferral offered by IRAs for another 18 months, but should they? Waiting longer to begin taking RMDs could push you into a higher tax bracket during retirement, and potentially increase the amount of taxable social security or generate additional income-related Medicare premium surcharges.

To counterbalance the tax deferral from the extension of contribution and RMD ages past 70 ½, the SECURE Act largely eliminated the “stretch IRA” strategy. Under the prior law, designated beneficiaries (humans and certain qualifying trusts) of inherited IRAs could take RMDs over their life expectancy. The younger the beneficiary, the greater the remaining life expectancy and the smaller percentage of the account withdrawn and taxed each year. Now, for IRA owners who die after December 31, 2019, beneficiaries other than “eligible designated beneficiaries” must empty the account by the end of the 10th year after the death of the IRA owner. Eligible designated beneficiaries are spouses, disabled or chronically ill persons, and individuals who are not more than 10 years younger than the deceased IRA owner. Those beneficiaries may generally still take their distributions over their life expectancy as under the pre-SECURE Act rules. Minor children of the account owner are also eligible designated beneficiaries, but they can only take age-based RMDs under the old rules until the age of majority, and then the 10 year rule kicks in.

Clients should reevaluate their IRA beneficiary choices and revisit how their IRA dollars fit into their overall estate planning strategy. For some, this could be as simple as making sure your beneficiary is an eligible designated beneficiary, or if that is not possible, increasing the number of beneficiaries to spread out the tax hit. Some clients might want to consider more complex strategies. Certain trust strategies could allow them to pass their accumulated retirement funds to their heirs on a tax-preferred basis, such as contributing their RMDs to a trust that can purchase tax-free wealth replacement life insurance or using a charitable remainder trust as the beneficiary of their account. In situations where the client has designated as their IRA beneficiary a trust that was designed to use the beneficiary’s life expectancy to stretch out RMDs under the prior law, the application of the SECURE Act rules could produce unintended adverse effects.

There were also a few notable non-retirement provisions in the SECURE Act. Tax-free distributions up to $10,000 (lifetime) from a 529 plan are allowed to pay principal or interest on a qualified education loan of a designated beneficiary and each of their siblings. Under the 2017 Tax Cuts and Jobs Act, for tax years 2018 and after, tax on the unearned income of children (the “kiddie tax”) was based on rates applicable to trusts, which are very compressed. The SECURE Act repealed these new rules so that starting in 2020, and with the option to start retroactively in 2018 and 2019, the kiddie tax rate returns to the marginal tax rate of the child’s parents. Potential tax savings could be achieved by filing amended returns to apply the new-old rates to unearned income in 2018 and/or 2019. Lastly, certain tax breaks were extended through 2020, including the exclusion from gross income for the discharge of certain qualified principal residence indebtedness, the mortgage insurance premium deduction and the deduction for qualified tuition and related expenses.

Like most tax laws, the SECURE Act presents both opportunities and challenges. Because most of its provisions go into effect in 2020, clients should talk with their advisor about whether and how the SECURE Act impacts them.

As Fiduciary Counsel, Westray oversees the firm’s legal matters, including its trust activities. Westray also serves as a resource to the firm’s individual clients with regard to their estate planning matters and to our nonprofit clients with regard to compliance issues.