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Archive for October, 2013

This is a really tough year for tax planning.  Most folks are only vaguely aware that their taxes will increase in 2013 vis-à-vis 2012 and in many cases that peripheral awareness exists only because of the pathetic partisan propaganda promulgated during the recent “hostage budget crisis” in Washington.  (How’s that for alliteration?)  Regardless of how aware they are, or which side of the aisle they hail from (or sip tea at), most high net worth taxpayers will be in for quite a jolt next April 15th.  For example, just this morning I prepared a client illustration using the client’s 2012 income and expense data plugged in to the 2013 tax program.  This was a purely hypothetical exercise designed to increase my client’s awareness of the higher tax environment we find ourselves in, yet it even took my breath away.  With his set of facts, the 2013 bottom-line federal tax was fully 50% higher than 2012! What a difference a year makes!

So, what are we really facing this year?  Well, for one thing, there is the reinstatement of the 39.6% tax bracket for individuals with taxable income in excess of $400,000 ($450,000 for married couples filing jointly).  For those in the top bracket, insult is added to injury with an additional increase in the top rate for qualified dividends and long term capital gains, from 15% to 20%.  The so-called “Pease” limitation is back, pilfering much of the benefit of itemized deductions for higher bracket taxpayers, as is the phaseout of personal exemptions.  Finally, courtesy of the 2010 Patient Protection and Affordable Care Act, the dreaded Medicare surtax kicks in – an additional 0.9% on compensation and self-employment income in excess of $200,000 ($250,000 for married joint) and a whopping 3.8% on net investment income for those with adjusted gross income exceeding $200,000 ($250,000 for married filing jointly).  Make no mistake – IT. WILL. GET. UGLY.

Deductions and credits!  Pass me my deductions and credits!  My kingdom for some deductions and credits!  Sorry, folks, not too many of those left, and even those that remain tend to get wiped out by the despotic alternative minimum tax (known in the profession as the AMT or, alternatively, “salt in the wound.”)

Except for charity.

Thankfully, despite attempts to limit or even eliminate the deduction for charitable contributions, such deductions are still alive and well and can make a dramatic difference in your tax picture if handled wisely.  They are deductible for both regular tax and AMT so, even if you are subject to the AMT, you will still save 26 or 28 cents on the dollar for each charitable dollar donated.  The income limitations are relatively high, but if you give that generously, you will still be able to carry over any excess contributions for up to five years.  And even New York State, which has effectively enacted a flat tax for high net worth taxpayers, still allows you to deduct half your charitable contributions.  Yes, charity is a golden form of tax planning, particularly for the charitably minded.  (Frankly, you may want to skip the rest of this blog post if you are not charitably minded – it never makes sense to give just for the sake of a tax deduction.)

The actual act and form of charitable contribution will vary depending on your situation, so it is important to discuss any plans with your tax advisor.  However, for the charitably minded, it should not be a question of “if” you give to charity, it should be more of a question of “when” and “how much” you give.  The tax benefits should not be the only reason you give, but they certainly make the process more affordable and provide instant (personal) gratification in the form of dollars saved from your income tax bill.

 

So, here are a few takeaways on yearend charitable giving.  Again, consult your tax advisor on specifics:

  • For most taxpayers, most of the time, giving appreciated long term property to charity is preferable to giving cash.  The reason is you get to deduct the fair market value of the property on the date of the gift rather than its lower cost basis and you don’t have to pay tax on the unrealized appreciation.  This is a two way winner for you.
  • Consider establishing a donor advised fund in tandem with your brokerage or money management account.  Providers such as Schwab and Fidelity make this process very easy.  The existence of the “tandem” DAF makes giving appreciated securities a snap at any time during the year.  Your deduction is immediate but your ultimate distribution to a public charity can be made on your timetable (i.e., this year or later).
  • If your estate and gift planning calls for it, get that private foundation or charitable trust set up now, before year end, so that it can accept contributions for 2013.  Waiting until the last week in December to structure such vehicles in unfair to the attorneys (no lawyer jokes, please) and increases the likelihood of drafting errors.
  • If you donate tangible property such as artwork, be aware of the absolute need for timely appraisals.  Without them your deduction will not stand up to IRS scrutiny.
  • Finally, some odds and ends to consider:
    • Clean out your closets and donate used clothing and household effects (in good condition or better) to a charitable thrift shop.  Be sure to get a receipt, especially if the claimed value is greater than $250.
    • Buy your spouse that new car s/he wants for the holiday and donate the old one to charity.  Restrictions apply.
    • Make sure your annual or yearend commitment to your house of worship is fulfilled.
    • Remember that mere pledges are not considered charitable contributions.  But contributions charged to a credit card are considered paid in the year charged.

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