Congress Continues Tax Bonus for Gifts of Securities In passing the American Taxpayer Relief Act of 2012, Congress preserved the advantages of contributing investment assets such as stocks, bonds, mutual funds and real estate that have grown in value and have been owned by donors more than one year. Donors can deduct the full fair market value of their assets, not just their purchase price, and avoid all taxes on their long-term capital gains. Taxpayers who are subject to the new top income tax rate of 39.6%, the new 3.8% tax on net investment income, and the increased capital gains tax rate of 20% will find gifts of appreciated securities and other assets even more favorable. For example, a donor who contributes $20,000 of stock burdened with $10,000 of long-term capital gain will enjoy deduction tax savings of $7,920 in a 39.6% tax bracket. Furthermore, he or she will avoid paying 23.8% in capital gains tax and net investment income tax on his or her $10,000 of “paper profit” – another $2,380 in savings. After taxes, a satisfying $20,000 gift costs our donor only $9,700 ($20,000 - $7,920 - $2,380).
Deduction Cutbacks Will Affect Very Few Charitable Contributors For 2013 and later years, the American Taxpayer Relief Act of 2012 has resurrected a restriction on certain itemized deductions (the “Pease” limitation) that applies to individual taxpayers with adjusted gross incomes above $250,000, married couples filing jointly with AGI of $300,000 and heads of households with AGI of $275,000. It reduces deductions by 3% of the amount by which one’s AGI exceeds the applicable thresholds, eliminating up to 80% of deductions for state and local income or sales taxes, real estate taxes, mortgage interest, miscellaneous expenses and charitable contributions. Deductions for medical expenses, investment interest and casualty losses are excluded. Will your 2013 charitable contribution deductions be reduced as a result of this new limitation? The answer is “no,” so long as your income does not exceed the threshold amounts listed above. But even donors with higher incomes generally should not be affected: In most cases, deductions for mortgage interest, state and local taxes and other itemized deductions will “soak up” any deduction cutbacks before charitable contributions are diminished. Here is a simple formula to determine whether you are affected:
If you likely will have deductions for state/local taxes, mortgage interest, real estate taxes, etc., equal to or exceeding the Line 4 amount, deductions for 2013 gifts to charity should be unaffected (Last year’s Form 1040 may a guide to estimating 2013 deductions).
No “Sunset” for $5,250,000 Estate Tax Exemption
The new tax law provides a permanent gift and estate tax exemption of $5.25 million (indexed for inflation). It also increases the tax rate from 35% to 40% on transfers above $5.25 million. The exemption for married couples now can total more than $10 million, thanks to permanent extension of “portability,” which allows a surviving spouse to inherit any unused exemption of the first spouse to die. The exemption was scheduled to drop to only $1 million after 2012, with a top tax rate of 55%, under a “sunset” provision.
Now that the uncertainty regarding gift and estate tax exemptions is relieved, it’s a good time for all of our friends to review their wills, trusts and other estate planning arrangements. In the process, we hope you will consider making or augmenting a thoughtful bequest to our future. Special opportunities exist for tax-wise legacies from IRAs and other retirement plans, life insurance and financial accounts. Keep in mind that you can make a bequest that also provides lifetime income to a spouse or other person.
Even if you won’t have to pay estate tax, remember that estate planning involves much more than federal estate taxes. All Americans need to plan for a thoughtful distribution of their assets at death, reduction of estate expenses such as probate, income taxes on retirement accounts, state inheritance or estate taxes (in 21 states) – and for leaving a legacy to future generations.
Charitable Remainder Trusts More Attractive to Investors in High Tax Brackets Investors who own assets burdened with long-term capital gains may find charitable remainder trusts attractive for their ability to liquidate stocks or real estate without increasing donors’ adjusted gross incomes – and their exposure to the new 20% capital gains tax rates and 3.8% Medicare surtax on net investment income. The tax is imposed on the lesser of net investment income or AGI in excess of $200,000 (unmarried taxpayers) or $250,000 (joint returns). Note: net investment income passed through to a donor/beneficiary from the trust will be liable for the 3.8% tax, but there won’t be a huge tax bite in the year of the gift or when the trustee sells and reinvests highly appreciated securities, real estate or collectibles. Donors furthermore receive charitable deductions and benefit worthwhile causes.
The materials contained on this website are intended only to show some ways by which you can make a charitable gift or bequest and thereby minimize federal tax liabilities, as authorized by the Internal Revenue Code. All examples are of a general nature only and should not be applied to your specific situation without first consulting your attorney or other advisers.