Annual exclusion and lifetime gifts
This is a good time to make annual exclusion gifts (up to $15,000 per person). Using marketable securities when volatility is high and valuations are down can provide for extra tax advantages on these gifts.
Making larger gifts with low value securities allows a taxpayer to remove assets from the taxable estate while retaining more of the estate tax, gift tax, and generation skipping transfer tax exemptions (currently $11,580,000). Investors who have concerns that the exemption will be lowered with the upcoming elections and possible changes in legislation should consider consuming a larger portion of the exemptions sooner rather than later. The IRS will not recapture these gifts if the exemption is lowered.
For donations made in 2020, the CARES Act provides incentives for making charitable gifts and offers financial relief for nonprofits and increased charitable giving incentives for individuals and corporations.
For taxpayers who itemize, the charitable cash contribution is increased from 60% of AGI limit up to 100% of AGI. The taxpayer must make an election. The existing five-year carryover rule remains in place, and the election would allow an increased amount to be deducted in 2020 and less carried forward.
For corporations, the percentage limitation on the corporate income tax charitable deduction increased from 10% to 25% of the corporation’s taxable income for 2020. In the case of charitable contributions by partnerships or S corporations, each partner or shareholder must separately elect to use the modified percentage limitations.
For taxpayers who take the standard deduction, the act allows an above-the-line deduction for cash contributions up to $300. In order for the contribution to be deductible, it must be given to a charitable organization described in Internal Revenue Code section 170(b)(1)(A).
These incentives are only available for cash contributions and are not available for contributions to supporting organizations and donor advised funds.
Charitable remainder trusts (CRT): Funding a charitable remainder trust with highly appreciated stock can solve capital gain tax problems and allow tax-efficient investment diversification. The CRT can sell appreciated assets and the donor avoids capital gain tax. To the extent capital gain income is paid to the donor, it is spread out over time.
Retirement planning: The act suspends required minimum distributions from most qualified retirement plans, including IRAs. The increased AGI limitations for cash contributions provides an opportunity for individuals between 59½ and 70½ to have benefits similar to a qualified charitable contribution. They can take a cash distribution from their IRA, and donate the cash to charity to offset a larger portion of their income taxes.
High net worth strategies: High net worth investors with appreciated assets should consider combining giving strategies to maximize gift tax benefits.
- Make larger donations in cash to charity.
- Consider gifting through a donor advised fund, donating long-term appreciated assets to minimize capital gains and maximize the 30% AGI limits for appreciated securities.
- Plan for future giving and take advantage of the increased AGI percentage limit by additional cash gifts to a donor advised fund.
- Use a combination of strategies to help take full advantage of the increased AGI percentage for gifts and receive tax savings on long-term appreciated assets.
The CARES Act has created a number of opportunities for charitable planning. Talk to your financial advisor to learn more about charitable opportunities during times of volatility.
Diversification does not guarantee a profit nor protect against loss. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.
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