|Gift Planning Tips|
Timely Charitable Gift Planning Advice
Here’s a low-risk/high-reward bit of gift planning advice for annual donors who are in high tax brackets and also own stocks with hefty long-term capital gains: Employ appreciated securities to make five or ten years’ worth of annual charitable contributions to a donor advised fund before January 1, 2014, then advise annual grants from the DAF in future years to organizations they support.
Clients can deduct the current high value of gift stock, up to 30% of their 2013 adjusted gross incomes (with five-year carryover of excess deductions) and avoid capital gains and net investment income taxes. Donors can pat themselves on the back if (as many expect) there is a future correction in the stock market, or if (as many expect) tax reform eventually takes a bite out of the charitable contribution deduction. Tax savings achieved from front-loading a client’s generosity can be reinvested for income or growth.
Can Gifts to Out-of-State Charities Affect Donors’ Domicile?
A number of states are changing laws and regulations on domicile to offer assurance that contributing to charities within their borders won’t subject “snowbirds” and other part-time residents to state taxes.
The Illinois Department of Revenue recently clarified that charitable gifts or bequests to Illinois charities won’t be considered as evidence that a donor is a resident of Illinois for tax purposes:
The action came in response to concerns of donors in states outside Illinois that their contributions to Illinois organizations might result in them being subjected to Illinois income tax and/or state estate tax. Similar legislation was signed into law in New Jersey by Governor Christie on June 27, 2013, to alleviate fears of out-of-state donors who wished to give to New Jersey charities.
This issue surfaced as early as 1984, when the New York State Department of Taxation issued an Opinion of Counsel that charitable contributions played no role in determining New York domicile [TSB-M-84-(17I), October 22, 1984]. A few years later the Massachusetts Department of Revenue announced that, while contributions had been part of determining domicile at common law, charitable gifts would be disregarded going forward (TIR 90-5: Massachusetts Treatment of Charitable Contributions in Domicile Cases, May 11, 1990).
Virginia, on the other hand, still includes charitable contributions among a number of factors to be considered in determining whether a person is a “domiciliary resident” [23 VAC 10-110-30(B)(3)]. Such provisions apparently led some Florida law firms to post website articles suggesting that new residents “reduce charitable contributions to northern organizations in favor of increased donations to Florida charitable entities,” and, “To the extent that you make charitable contributions to out-of-state national charitable organizations, such contributions should in the future be made to the local branches in Florida.” Charities outside Florida obviously worry that such advice goes too far, particularly with respect to states where, by statute or regulation, contributions can’t be considered evidence of domicile.
The IRS recently announced cost-of-living adjustments for various 2014 tax numbers that may impact charitable gift annuity planning for older married couples:
Assuming that some income (such as Social Security) won’t be fully taxed, a senior couple that doesn’t itemize deductions could have gross income of $100,000 or more and still be in the 15% tax bracket, after subtracting their exemptions and standard deduction.
How does this affect charitable gift annuity planning? Take the case of a husband and wife, each age 76, who contribute $20,000 cash for a two-life gift annuity in early 2014, when the §7520 rate is 2.4%. Their charitable deduction is $7,800 and they will receive $1,040 annually, of which $782 will be tax free during their joint life expectancy. Because they have few additional itemized deductions, the $7,800 gift deduction is of little or no use to them. They do like the idea, however, of having 75% tax-free payments into their early 90s. With that in mind, their adviser decides to elect a lower, 2.0% §7520 rate from a month previous to their gift. Tax results? The couple’s deduction declines to $7,428, which is unimportant to them, but the amount of their tax-free payment goes up to $806 (77.5%)…a tax break they can actually use.
Note: As 15% bracket taxpayers, the couple could fund their gift annuity with appreciated securities, avoid tax on about a fourth of any long-term capital gain and report the rest pro-rated over their joint life expectancies. Under current law, such gain would be tax free to them to the extent they remain in the 15% bracket.
Farmer Frank owns 350 acres of timberland near a college campus. The land is worth $100,000 and Frank has a basis of $40,000. The college recently received a bequest of farmland it would like to sell – and which Frank would like to buy. The farmland has been appraised at $80,000.
Frank proposes a swap of the properties, to which the college readily agrees. Since Frank gives up property worth more than the property he receives, he will be deemed to have made a charitable contribution (in the amount of $20,000). He will also be deemed to have made a bargain sale and, were it not for the “like-kind” exchange provisions of IRC §1031, Frank would realize gain in the amount of $80,000 (the amount realized by him) less his basis, as adjusted under the bargain sale rules. Frank’s basis, as adjusted, is equal to $40,000 (his cost basis in the timberland) x [$80,000/$100,000], or $32,000.
The like-kind exchange provisions of IRC §1031 generally provide that no gain is recognized upon the exchange of one kind of property for property of a like kind (certain exchanges are excepted, but exchanges of land for land or machine for machine usually come within the nonrecognition rule). In the situation at hand, the like-kind exchange provisions apply, and no gain is realized on the bargain sale. As discussed above, Frank’s basis in the acquired farmland will be $32,000 (his adjusted basis for determining gain on the bargain sale) [Rev. Rul. 78-163, 1978-1C.B. 257].
This kind of transaction can have obvious benefits for both individuals and charities wanting to trade parcels of real estate. For more on bargain sales, see the discussion beginning on page 2-83 of the Charitable Giving Tax Service.
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