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As much as we try to avoid it, taxation is a part of life. We are faced with sales tax, income tax, estate tax, capital gains tax, gift tax and property tax to name a few. With the 2018 year coming to a close, some of us are thinking what else can we do to minimize our tax bill, both now and at death. I am not an accountant and cannot give you tax advice, but there are some tax savings opportunities that exist out there that are good to remind ourselves about.
Many accounting firms put out year-end tax tips. I also just received an email from the Brainerd Lakes Area Community Foundation with a list of ways clients can minimize taxes and increase their charitable giving. The following information is from those accounting lists and the Brainerd Lakes Area Community Foundation.
There are basic strategies like comparing standard versus itemized deductions or contributing to your retirement plan to reduce your taxable income. If you have a large capital gain for the year, you may want to sell some stock to generate a loss before year end. Or you may have your favorite charities that you like to provide a cash gift to at year-end and take a deduction on your tax return.
However, American’s tend to have the bulk of their estate in assets and not cash. As a result, it makes cash giving a more difficult step since you are relying on those cash dollars for your living expenses. More families are stepping outside of this traditional means of giving and tax deduction by using some of the following methods. Each situation takes a review of the tax, legal and accounting impact to make the right decision.
If you own an individual retirement account (“IRA”), once you reach age 70 ½ you will be required to start taking a required minimum distribution (“RMD”) on an annual basis. That RMD distribution will now be subject to tax. The Internal Revenue Service (“IRS”) allowed you to invest that money and let it grow tax-free. However, when you reach 70 ½ the IRS wants its fair share of the tax on that growth. For some families the entire amount of the RMD may not be required for daily living. If that’s the case, you may want to consider directing the distribution from your IRA to a charity. The distribution can still count toward your RMD and the charity will not have to pay any tax on that gift. You accomplish a tax savings and benefit the charity of your choice.
Another option is to make a gift of appreciated stock to a donor advised fund. With the tax law changes, many advisors are looking at donor advised funds with clients to maximize their charitable deduction. The following is from the Community Foundation newsletter to explain this concept further:
You have likely heard that the Tax Cuts and Jobs Act, which went into effect December 2017, increased the standard deduction from $12,700 to $24,000 for married filing joint returns. This change significantly decreases the advantage of claiming many itemized deductions, including charitable contributions.
Many professional advisors are recommending their philanthropic clients establish a donor advised fund and “bunch their gifts” every other year or every few years to take advantage of the charitable deduction in certain years and use the standard deduction in the other years. The charitable deduction is received in the year that money is donated to the donor advised fund, but the donor through making grant recommendations determines the timing of distributing the money to the final charities. A donor advised fund can therefore distribute grants on an annual basis which provides consistent support to the nonprofits the donors care about.
To understand the example, let’s assume that John & Mary Smith typically gift $15,000 per year to nonprofits. They would like to take advantage of the tax deduction for their gifts. They could choose to fund a donor advised fund in January for $15,000 and another $15,000 in December 2018. For the 2018 year, the Smith’s will have at least $30,000 in itemized deductions so they will likely choose to itemize their deductions. In 2019 they would then likely take the standard deduction because their itemized deductions are under the $24,000 threshold. They can still disburse their normal amounts to the charities in 2018 and have a remaining $15,000 available to distribute in 2019.
You may be considering the best way to transition appreciated real estate to the next generation. Depending on your estate size, you may be able to accomplish a transition of a portion of that to the next generation with low to no estate tax and still accomplish a gift to your favorite charity with the use of a charitable trust. You get an immediate tax deduction, establish an income stream to one or more beneficiaries and also benefit your favorite charity. Are you looking at selling your business and don’t want to take a large tax bite. Again, you may want to consider a donor advised fund scenario and save some taxes.
There is not one size fits all and this article barely scratched the surface on this topic. But, hopefully it gets you thinking about ways in which you can save some money.
Please send me an email at rene@breenandperson.com with any topic suggestions or requests you may have. Although we cannot give you legal advice through the column, we can provide some general information that may be helpful for you to know. Our purpose is to educate and we hope that you can take something new away from this column each time you read it.