When is the best time to plan your giving? The sooner the better, but don’t worry. There are still some things you can do to save on taxes and give more.
- Year-end is an ideal time to discuss your charitable goals and objectives with your spouse or family.
- It may be appropriate to concentrate gifts either immediately before year end, or after year end, if you’re likely to be switching tax brackets due to retirement or other circumstances.
- Non-cash gifts, such as publicly traded stocks, privately held business interests, and real estate will often provide more enhanced tax benefits than traditional gifts of cash.
The last months of the year are commonly referred to as the Giving Season. According to a Charity Navigator research study, on average, charities receive as much as 40 percent or more of their charitable gifts in the last few weeks of the year, the general time frame of Thanksgiving to New Year’s. This spike in generosity at the end of the year is often attributed to a number of factors, including the altruistic spirit of the holidays, increased appeals from charities as they plan their budgets for the following year, and various tax benefits that encourage charitable giving (and which must be secured by December 31 to be deductible in the current tax year).
Now is a great time to discuss your charitable goals and objectives, while you’re contemplating year-end gifts. So, consider these planning strategies to ensure you plan your charitable giving in the most tax-efficient and effective manner as the 2019 tax year comes to a close.
Depending on your overall tax circumstances, it may be appropriate to concentrate gifts either immediately before year end, or after year end. For example, if you expect to be in a lower income tax bracket next year, perhaps as a result of a recent retirement, it may be advantageous to accelerate gifts that would otherwise be made next year (or even for several future years) in order to maximize your tax benefit from your charitable deduction. Assume you plan to give $100,000 next year; you are currently in the 37 percent federal income tax bracket, but expect to be in the 25 percent tax bracket next year. By simply accelerating next year’s gift into the current year, you’ll save $12,000 in taxes.
Gifts of appreciated publicly traded stocks
Although cash gifts are by far the most common and simplest of gifts, if you have appreciated publicly traded stocks, you may capture essentially double tax benefits by giving stock instead of cash.
For example, let’s assume you plan to make a charitable contribution of $100,000 and are simply planning to write a check for that amount. However, suppose you also own $100,000 of Apple stock that you bought many years ago for $25,000. If you give the stock to charity, you’ll receive the same charitable deduction as a cash gift (saving $37,000 if you’re in the highest federal tax bracket), but you’ll also avoid a capital gain tax of 20 percent and the Medicare tax on net investment income of 3.8 percent, thereby avoiding $17,850 in taxes. As a result, you would save a total of $54,850 ($37,000 federal tax + $15,000 capital gains tax + $2,850 Medicare tax on Net Investment Income) on a $100,000 gift.
If you wanted to keep your investment in AT&T, you could simply repurchase the stock immediately with the cash you otherwise planned to give, and thereby increase your tax basis to the stock’s current value, $100,000.
Gifts of non-cash assets
Similar to publicly traded stocks, there may be other assets, such as real estate and privately owned businesses, that provide enhanced tax benefits when gifted to charity. These assets are often illiquid, but may nonetheless be ideal assets for giving.
Anticipating a sale?
If you have plans to sell such an asset in the near future, a charitable gift will provide similar benefits to publicly traded stocks, often allowing your clients to avoid capital gain tax, or at least dramatically reduce their tax liability. It’s not unusual for a privately owned business and investment real estate to have very low tax basis, often significantly lower than the basis clients might have in their liquid investment portfolios. In such cases, a gift of a business interest or real estate may well avoid even more capital gain tax than a gift of publicly traded stock.
In addition, if you’re planning to sell your business or real estate in the near future and make a particularly large charitable gift, you might capture additional tax benefits by making a charitable gift in the year (or years) prior to the sale. If the planned gift is so large that it exceeds your ordinary income, some of the deduction would be applied to offset capital gain income at a significantly lower tax rate – 20 percent, compared to as much as 37 percent. By making a gift in one or more years prior to the year of the expected sale, more of the charitable deduction can be used against ordinary income.
For example, assume you plan to sell your $5 million business next year, and make a gift of $500,000 from the proceeds of the sale. Your adjusted gross income (AGI) for the current year (2019) is expected to be $750,000, consisting of $200,000 of salary and $550,000 of K-1 income from the business. Your AGI next year (2020) is expected to be $4,600,000, consisting of $100,000 of salary and $4,500,000 of capital gain income. The $100,000 salary reflects the expectation that the business will be sold halfway through the year, and so you’ll receive half of your annual salary. The $4,500,000 of capital gain income assumes a zero tax basis, and reflects the $500,000 charitable gift of the business that would be made before the sale. If you make the gift in the year of the sale (2020), then your $500,000 charitable deduction would offset your ordinary income of $100,000, but the remaining $400,000 of deduction would offset capital gain income on the portion of the business you retain.
If, instead, you gave a $500,000 interest in your business in the year prior to the sale, you could offset $200,000 of ordinary income in the current year, and then carry forward $250,000 of deduction to the next year (taking into account a 10 percent valuation discount) and apply this deduction to your $100,000 of ordinary income in that year, with your remaining deduction of $150,000 offsetting capital gain income. In light of the differential in tax rates between ordinary income and capital gain, you could save up to $34,000 in taxes by simply making your $500,000 charitable gift in December 2019, as opposed to sometime prior to the sale in 2020.
No anticipated sale (“give and hold”)
Even if there is no anticipated sale in the near future, you may nonetheless gift an interest in your business or real estate, and still capture valuable charitable deductions. This “give and hold” strategy can be particularly beneficial in helping clients maximize their allowable charitable deductions. Although cash contributions may be deductible up to 60 percent of your AGI, gifts of non-cash assets, such as business interests or real estate, are only deductible up to 30 percent of AGI. Particularly for business owners, the value of your business often represents the vast majority of your total wealth. Often, a gift of even a small percentage of a business can produce significant income tax savings, allowing you to give more or give the same amount at a lower cost to you.
For example, consider a business owner who owns a $5 million enterprise that produces $500,000 in annual taxable income. In order to secure the maximum allowable deduction for a gift of this asset, 30 percent of AGI, you must make a gift of $150,000. This represents a gift of only three percent of the business, but produces tax savings from the charitable deduction of $55,000, assuming a 37 percent federal tax rate. It is not unusual for successful businesses to appreciate in value at rates higher than what is necessary to give each year in order to maximize the 30 percent of AGI deduction. As a result, you may be able to make such gifts each and every year without decreasing the value of the business you own directly. Over time, you’re simply giving a portion of the growth and appreciation in the business. In addition to the business or real estate interest gift, some givers will also give all or a portion of the income tax savings (in the form of cash) generated by the business or real estate gift in an effort to reach the annual maximum AGI deduction threshold.
This is an ideal time of year for you to make wise charitable gifts, so you can do well for yourself and your family while helping others.