Featured Article
Create Your Own Good News in Troubled Financial Times: 7 Charitable Year-End Strategies
Posted November 2008
In the newspaper, on television, on the Internet—stories about the challenges facing the American economy are everywhere.
We have been buffeted about on the waves of rising gasoline prices and falling returns on income producing investments. We have been bounced through the crests and troughs of an up-and-down stock market. Most of us are ready for some good news.
In the midst of these economic challenges, charitably minded people have ample reason to take heart. While unable to drive down the cost of regular unleaded, there are strategies to brighten your own personal economic forecast—strategies that can even take advantage of some of the current economic challenges.
In essence, you can create your own good news—if you incorporate the right strategies into your year-end tax planning.
In this month's featured article, we examine seven of the most powerful and most creative strategies that you can use before year-end.
1. Cut Your 2008 Tax Bill While Supporting Our Mission
A gift to by December 31 will not only enable you to make an investment in our mission, it can also allow you to slash your federal tax obligation this year. If you itemize your deductions for federal tax purposes, the amount you save will depend on your marginal federal income-tax bracket. Read more...
Example: Joe and Donna T expect to have taxable income of about $250,000 in 2008, which puts them in the 33% federal tax bracket. They decide to make an unrestricted gift of $20,000 to support our operating budget this year.
Result: This gift saves Joe and Donna $6,600 in federal income tax ($20,000 x 33%). Note: They may be able to save state income tax as well.
2. Plan Your Charitable Gift to Do Double Duty—Give Appreciated Assets
In most cases, if you give appreciated assets that you have held for more than one year, you can deduct the full fair-market value and avoid capital-gain tax. Read more...
Example: Karen B makes a gift to us of stock worth $50,000 purchased seven years ago for $12,000.
She is allowed a deduction for the stock's full $50,000 value, which saves her $16,500 in her 33% bracket. In addition, Karen avoids $5,700 in capital-gain tax she would have owed had she sold the stock. Total savings: $22,200.
3. Make a Gift, Recoup Your Investment, and Save Taxes
In some cases it may be more convenient or beneficial to use a noncash asset to fund your gift, but you may not want to part with its entire value. One strategy to reach your giving goal is simply to sell the asset to at a bargain price. Read more...
Example: Frank J wants to make a gift to us of a parcel of undeveloped real estate worth $300,000. He sells the land to us for $100,000 to recover his original investment.
Results: Frank can claim a charitable deduction for the difference between the full fair-market value of the land and the amount he receives in payment ($300,000 - $100,000). This $200,000 deduction saves Frank $70,000 in his 35% tax bracket.
Frank will have to report a capital gain of $66,667 (one-third of the $200,000 gain) and pay capital-gain tax of $10,000. But he will avoid tax on the other two-thirds of his gain, saving $20,000 in capital-gain tax.
There are special rules that apply to certain types of property. Be sure to check with your tax advisor as you plan your year-end giving.
4. Fund Future Gifts with Your "Deduction Chain"
Did you know that it is possible to use the tax savings from your initial gift as your source of funds for future gifts? You can actually avoid future out-of-pocket cost and increase your giving potential by 50% simply by "regifting" your tax savings. Read more...
For instance, if you make an initial $100,000 contribution and are in the 35% federal tax bracket, your gift can compound into more than $150,000 of benefit to in just four years. How? Each year, you simply use the previous year's tax savings to fund the next year's gift.
5. Increase Your Cash Flow
With the current low interest rates on traditional investments, you may find that this is a perfect time to consider creative charitable planning strategies that allow you to make a gift, generate a charitable deduction, and receive payments based on the value of your contribution. Read more...
Collectively these are called life-income gifts. There are various options available to generate income for life; one of the most popular and versatile is the charitable gift annuity.
The amount of income from a gift annuity depends on the amount of the contribution and the age(s) of the beneficiary(ies).
6. Trade Your "Income Interest" for a Major Deduction
If you have already funded a life-income gift with us and find you no longer need the additional income, this may be an opportune time to give up that life-income interest and generate another charitable deduction. Reason: The value of an income interest goes up when the IRS discount rate is down. Read more...
Example: Several years ago when the IRS discount rate was 6.2%, Robert took out a $100,000 gift annuity with and we promised to pay him $7,000 annually for his lifetime. He also received a charitable deduction of $36,519 and saved $14,279 in taxes at that time.
Robert is now 75 years old and no longer needs the annuity income we are paying him. He wishes to give up his right to receive the payments and inquires about the tax consequences.
At the current IRS discount rate of 4.2%, the present value of his right to receive $7,000 a year from us is $57,630. Had the discount rate stayed at 6.2%, the value would have been $51,187—substantially less.
By giving up the annuity income, Robert will be entitled to an equivalent charitable deduction of $57,630 that will save him $20,171 in taxes this year. This means Robert is able to make a $100,000 gift to us at a cost of only $16,550 ($100,000 less [$34,450 total tax savings + $49,000 income over the last seven years] = $16,550). And we will be able to use the released funds immediately.
7. Make a Significant Gift Without Leaving Home
A special tax-law provision gives you a significant deduction for making a gift of your home to —yet allows you to continue living there for the rest of your life. You keep what is known as a "life estate" and transfer what is known as the "remainder interest" to us. Read more...
This is a potent planning strategy at any time; but, as with a gift of an income interest, it is even more valuable when the IRS discount rate is low.
Example: Dave and Sharon, both 72, are entitled to a deduction for 2008 of more than $214,000 for a gift of a remainder interest in their $500,000 home at the prevailing IRS 4.2% discount rate. In their 35% tax bracket, this saves them more than $75,000; and they are able to remain in their home for the rest of their lives.
The remaining days of 2008 may pass quickly. We encourage you to get started on the year-end strategies that best fit your situation right away.
Please contact us for our assistance with your gift plans.
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