Tax Saving Tips – Smart Ways To Give

Tax Saving Tips – Smart Ways To Give

Thanks To Tax Law Changes, Qualified Charitable Distributions (QCDs) are more attractive than ever for IRA holders.

As 2018 rolls into the 4th quarter, the tax changes implemented this year may have implications for you.  These tax changes will take away some of our itemized deductions and limit others.  However, I would like to open your eyes to some options that should be considered to help save on your tax exposure.  Let’s explore two simple ways to save on your tax costs.

  • Tax savings on gifting even if you do not itemize
  • Harnessing the power of appreciation

Let’s start with Qualified Charitable Distributions (QCDs).  Thanks to tax-law changes, QCDs are more attractive than ever for IRA holders.  For individuals age 70 ½ and older that are charitably inclined, the use of the QCD is a valuable tool to help lower your tax exposure and can also keep your Medicare premiums in check.  For example, after age 70 ½, individuals are required to take minimum distributions (RMD) from their traditional IRAs that count as taxable income.  The new tax laws provide a single filer a $12,000 standard deduction and married filing jointly a $24,000 deduction.  If your itemized deductions do not total the amount provided by the standard deduction, you would not get the tax benefit of a charitable gift. However, if you designate all or a portion of your RMD to a qualified charity, you give the 501(c)(3) organization the full market value of the gift, pay no income tax on that gift, and satisfy some or all your RMD.  By not taking the RMD as income, you will also lower your Modified Adjusted Gross Income (MAGI), which your Medicare premium is based on.  You do not get the deduction, but this is a triple win.  Lower taxable income, gratification of philanthropy and help to manage Medicare premiums.

Another tool investors may find valuable is harnessing the power of appreciation.  With the markets near all-time highs, and the recent increase in volatility, taking profits from sizable gains off the table may be a good plan for some, but will expose you to tax consequences.  Assets held longer than 12 months qualify for long term gains.  If you are single and your income is over $38,000 or file jointly and your income is over $77,200, your Long-Term Capital Gains (LTGC) are taxed at either 15% or 20%.  Those assets held less than 12 months are classified as ordinary income and taxed at your income rate.  If your MAGI exceeds $200,000 as a single filer, and $250,000 married/joint, those gains come with an additional 3.8% net income tax making the tax on gains 23.8%.   Then factor in another 5% – 8% for NJ if you reside here, and now we are up to 28.8% to 31.8% tax, ouch!  Who thought taking a profit could be so costly!  However, here are two options to consider for those that are charitably inclined:

1. Donate the appreciated stock directly to the 501(3) organization.

  • The 501(c)(3) gets the full market value of the stock transferred;
  • The investor does not pay any tax on the gains;
  • The investor gets the FMV deduction for the gift if they itemize.

2. Open and fund a Donor Advised Fund (DAF).

  • The investor can transfer appreciated stock directly into the DAF and pay no gains because the DAF qualifies as a 501(c) (3);
  • The investor gets the deduction for the full market value in the year transferred;
  • The owner of the DAF can distribute the funds to other preferred 501(c)(3)s over time;
  • This can help a taxpayer get over the hurdle of the standard deduction in alternate years by bunching gifts that may be given over the course of several years.
    • (i).  EX: Transfer 180 shares of AAPL @ $222 into your DAF and claim $40,000 charitable deduction for 2018.  Over the next 4 years gift $10,000 to one or several 501(c)(3) organizations. There is currently no time limit to gift this money and you do not get the charitable deduction in the subsequent years, only in the year you fund the DAF.

Some additional consideration of using a DAF over and above the tax savings is a way to preserve anonymity if desired.  Setting up a DAF is an easy process that requires no attorneys and there is no cost to open a DAF.  This also can be used as a tool to engage the family around your philanthropy.  Possibly have a family discussion and let family members have a say in the 501(c)(3) they would like to promote.  These types of exercises educate your children in the value of philanthropy, your values, their judgements and interest, and building a family brand.

AEPG is always looking for ways to help you make smart decisions with your money.  Any additional questions can be directed to your advisor or myself.


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