1 / 104

CHARITABLE PLANNING FOR UPPER-INCOME DONORS

CHARITABLE PLANNING FOR UPPER-INCOME DONORS. PRINTING SUGGESTIONS: If you want to print out these slides, may I suggest: #1 – AVOID PRINTING THE DARK BACKGROUND. It makes it hard to read. Suggest using the print command “BLACK and WHITE”; avoid using “color”

Download Presentation

CHARITABLE PLANNING FOR UPPER-INCOME DONORS

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. CHARITABLE PLANNING FOR UPPER-INCOME DONORS PRINTING SUGGESTIONS: If you want to print out these slides, may I suggest: #1 – AVOID PRINTING THE DARK BACKGROUND. It makes it hard to read. Suggest using the print command “BLACK and WHITE”; avoid using “color” #2 – PRINT SIX SLIDES PER PAGE. Slides contain a very large font. Six slides per page will conserve paper.

  2. CHARITABLE PLANNING FOR UPPER-INCOME DONORS Advancement Network 2014 Annual Conference Cleveland, Ohio -- October 18, 2014 CHRISTOPHER R. HOYT University of Missouri - Kansas City School of Law

  3. Tax Planning Challenges * Planning Strategies for the new 3.8% surtax: Net Investment Income * Retirement Assets -- Hot Topics -- Lifetime planning -- Bequests of Retirement Assets -- spouse -- trusts -- charities

  4. INCOME TAX RATES INVEST WAGES LTCG Income Level -MENT(+1.45%)& Divid AGI < $200k/$250k 28% 29.4% 15% Congratulations! Brilliant tax planning! “Bush tax cuts” remain in full effect for people with adjusted gross income under $200,000 ($250,000 on a joint return)

  5. INCOME TAX RATES INVEST WAGES LTCG Income Level -MENT(+1.45%)& Divid AGI < $200k/$250k 28% 29.4% 15% AGI > $200k/$250k 33% 34.4% 15% 33% rate when taxable income > $186,350 -- single > $226,850 – married filing jointly

  6. TAX RATES paid on TAXABLE INCOME ADJUSTED GROSS INCOME (“AGI”) Minus: Greater of -- Standard Deduction ($6,100) or -- Itemized Deductions (Mortgage interest; charitable contributions; state & local taxes) Minus:Personal Exemption & Dependents ($3,900 each) = TAXABLE INCOME

  7. WEALTHY PAY SOME TAXES ON “AGI” ADJUSTED GROSS INCOME(“AGI”) Minus: Greater of -- Standard Deduction ($6,100) or -- Itemized Deductions (Mortgage interest; charitable contributions; state & local taxes) Minus:Personal Exemption & Dependents ($3,900 each) = TAXABLE INCOME

  8. INCOME TAX RATES INVEST WAGES LTCG Income Level -MENT(+1.45%)& Divid AGI < $200k/$250k 28% 29.4% 15% AGI > $200k/$250k 33% 34.4% 15% plus health care surtax 3.8% 0.9% 3.8% 36.8% 35.3% 18.8%

  9. 0.9% MEDICARE SURTAX:When CompensationExceeds $200,000 ($250,000 married joint return) • Compensation -- wages & self-employment income (Added to 1.45% Medicare/Medicaid tax ) (Employee pays entire 0.9%; no employer match) • Employer must withhold when W-2 Form compensation exceeds $200,000 • Married joint? Together over $250,000? -- Pay on Form 1040 , e.g. if neither spouse has over $200,000 . (e.g., Husband has $100k and Wife has $160k = $260k)

  10. 3.8% Net Investment Income TaxMAGI > $200,000 ($250,000 joint returns) 3.8% surtax on the lesser of: • Net Investment Income or • MAGI over $200,000 ($250,000 joint) ( $200k/$250k not indexed for inflation ) Trusts and estates pay 3.8% at $12,150 !!

  11. 3.8% Net Investment Income TaxMAGI > $200,000 ($250,000 joint returns) How many people are affected? 2011 Tax Returns with AGI over $200,000: 3.2% of all returns • 0.7% of single returns • 7.6% of married joint returns 86% of the returns with over $200,000* of AGI were married joint

  12. 3.8% Net Investment Income TaxMAGI > $200,000 ($250,000 joint returns) Strategies for three different taxpayers: #1 - Richest 1% - Income over $400,000 -- Reduce NII (not likely to get AGI <200k) #2 – Taxpayers with AGI near $200k ($250 jt) -- Either reduce NII or reduce AGI #3 - Taxpayers with AGI below $200k ($250 jt) -- Avoid spikes in income that trigger 3.8% tax -- Charitable Remainder Trusts !!

  13. CHARITABLE REMAINDER TRUSTS Payment to non-charitable beneficiary (ies) for life *or* for a term of years (maximum 20 years) Remainder interest distributed to charity Exempt from income tax

  14. CHARITABLE REMAINDER TRUSTS EXAMPLE Husband & wife age 65 Sell stock or land for $1 million gain Other option: contribute to CRT before sale is finalized; have CRT make the sale

  15. CHARITABLE REMAINDER TRUSTS CRT PROVIDES: 1. Charitable income tax deduction 2. Greater cash flow for life 3. Avoid spike in income – 3.8% tax 4. “Wealth replacement” strategy with life insurance.

  16. CHARITABLE REMAINDER TRUSTS DONATE STOCK TO C.R.T.; KEEP THE STOCK C.R.T. SELLS STOCK Sales Price $ 1,000,000 $1,000,000 Cost of Stock -0--0- Gain on Sale $ 1,000,000 $1,000,000 Capital Gains Tax (about 25%)250,000None Remaining Proceeds $ 750,000 $1,000,000

  17. CHARITABLE REMAINDER TRUSTS DONATE STOCK TO C.R.T.; KEEP THE STOCK C.R.T. SELLS STOCK Remaining Proceeds $ 750,000 $1,000,000 Interest Rate x 5% x 5% Annual Income $ 37,500 $ 50,000══════ ══════ (33% more)

  18. 3.8% Net Investment Income TaxMAGI > $200,000 ($250,000 joint returns) Net Investment Income • Interest & Dividends • Annuities • Rents & Royalties • Profits from LLC / S Corp (if not employed) • Business of trading commodities & fin instruments • Most capital gains

  19. 3.8% Net Investment Income TaxMAGI > $200,000 ($250,000 joint returns) Income Exempt from Surtax: • Trade / Business income from an LLC, partnership, Subchapter S corporation or sole proprietorship, provided the recipient is employed at the business. -- “material participation” test (work 500+ hours during the year?) • Gain from selling property used in trade/ business [rental property gains -> 3.8% tax]

  20. 3.8% Net Investment Income TaxMAGI > $200,000 ($250,000 joint returns) Other Income Exempt from 3.8% Surtax: Income that isn’t interest, rents, gains, etc : • Retirement income – social security, qualified plans: IRAs, 401(k), pensions, etc – (non-qualified annuities are subject to tax) • Wages & self-employment income ( 0.9% tax) • Alimony income • Lottery winnings

  21. INCOME TAX RATES INVEST WAGES LTCG Income Level -MENT(+1.45%)& Divid AGI < $200k/$250k 28% 29.4% 15% AGI > $200k/$250k 33% 34.4% 15% plus health care surtax 3.8% 0.9% 3.8% 36.8% 35.3% 18.8%

  22. INCOME TAX RATES INVEST WAGES LTCG Income Level -MENT(+1.45%)& Divid AGI < $200k/$250k 28% 29.4% 15% AGI > $200k/$250k 33% 34.4% 15% AGI > $250k/$300k33% 34.4% 15% -- 3% phase-out itemized deductions -- Phase-out personal exemptions

  23. PHASEOUTSAGI > $250,000 ($300,000 joint returns)[2014: > $254,200 ($305,060 joint returns)] • 3% Phase-out Itemized Deductions -- disguised 1% tax rate hike (3% x 33% rate) • Personal and Dependent Exemptions -- $3,900 apiece for self & each dependent -- lose 2% for every $2,500 income increase -- 100% eliminated AGI > $377k ($427k jnt) (Phase-out $254k-$377k ( $305k-$427k jnt))

  24. INCOME TAX RATES INVEST WAGES LTCG Income Level -MENT(+1.45%)& Divid AGI < $200k/$250k 28% 29.4% 15% AGI > $250k/$300k33% 34.4% 15% plus 3% phase-out 1% 1 % 1% plus health care surtax 3.8% 0.9% 3.8% 37.8% 36.3% 19.8% [plus personal exemption phase-out means extra tax until AGI $377,000 ($427,000 jnt)]

  25. INCOME TAX RATES INVEST WAGES LTCG Income Level -MENT(+1.45%)& Divid AGI < $200k/$250k 28% 29.4% 15% Taxb>$400/$450 39.6% 41.0% 20%

  26. INCOME TAX RATES INVEST WAGES LTCG Income Level -MENT(+1.45%)& Divid AGI < $200k/$250k 28% 29.4% 15% Taxb>$400/$450 39.6% 41.0% 20% plus 3% phase-out 1% 1 % 1% plus health care surtax 3.8% 0.9% 3.8% With $12,000+ income, 44.4% 42.9% 24.8% Trusts & Estates >> 43.4% 23.8%

  27. 3.8% Net Investment Income TaxMAGI > $200,000 ($250,000 joint returns) Two Ways to reduce the 3.8% surtax : #1 - Reduce AGI to less than $200,000 ($250,000 joint) and/or #2 – Reduce Net Investment Income

  28. 3.8% Net Investment Income TaxMAGI > $200,000 ($250,000 joint returns) Strategies for three different taxpayers: #1 - Richest 1% - Income over $400,000 -- Reduce NII (not likely to get AGI <200k) #2 – Taxpayers with AGI near $200k ($250 jt) -- Either reduce NII or reduce AGI #3 - Taxpayers with AGI below $200k ($250 jt) -- Avoid spikes in income that trigger 3.8% tax

  29. Reduce Net Investment Income Two Ways to reduceNet Investment Income: #1 - Convert NII into income that isn’t NII #2 – Shift NII to family and to charity that aren’t subject to tax on their NII

  30. Reduce Net Investment Income Convert NII into Income That Isn’t NII Some examples: #1 - Taxable interest to tax-free muni interest #2 – Life insurance #3 – Work 500+ hours at business #4 – Monster-size Roth IRA Conversions

  31. Reduce Net Investment Income Shift NII to Family/Charity who pay no 3.8% tax [note: trusts do pay 3.8%] Family: Give income-generating investments Charity: #1 – Make gifts of appreciated stock #2 - Donor advised funds & private foundations #3 – Charitable lead trusts

  32. #1 – MAKE GIFTSOF APPRECIATED STOCK DOUBLE-TAX ADVANTAGE • Charitable Income Tax Deduction for the Full Appreciated Value of the Stock • Never Pay Income Tax on the Growth of the Value of the Stock • Loss Property? Sell for tax loss; give cash

  33. DOUBLE BENEFIT FROM GIFT OF APPRECIATED L.T.C.G. PROPERTY << AVOID LONG-TERM CAPITAL GAIN TAX << CHARITABLE INCOME TAX DEDUCTION

  34. $ BenefitsMax Federal Taxes Saved Person in 2012 50% * 25% RE Dep Recap * 28% Collectibles << 15%* LTCG Tax Rate << 35% Marginal Tax Rate

  35. IMPACT OF INDIVIDUAL INCOME TAX RATE CHANGES in 2012 and 2013-14

  36. FUTURE INCOME TAX RATES Highest tax rates 20122013-14 Investment income 35% 44.4% Earned income 36.4% 43.0% (wages – 1.45% health) LT Capital Gains15% 24.8%

  37. $ BenefitsMax Federal Taxes Saved Person in the Year 2012 50% * 25% RE Dep Recap * 28% Collectibles << 15%* LTCG Tax Rate << 35% Marginal Tax Rate

  38. $ BenefitsMax Federal Taxes Saved Person in the Year 2014 65.4% * 29.8% RE Dep Recap * 32.8% Collectibles << 24.8%* LTCG Tax Rate << 39.6*% Marginal Tax Rate (3.8% surtax not avoided by charitable deduction)

  39. Reduce Net Investment Income Shift investment income to charity: #1 – Make gifts of appreciated stock #2 - Donor advised funds & private foundations #3 – Charitable lead trusts

  40. DONOR ADVISED FUNDS Administrative Convenience – split large gift to many charities -- anonymous gifts possible with DAFs -- one receipt from DAF/PF instead of many CWAs from many charities

  41. ShiftNet Investment Income Client with $400,000+ of income says: • “My $100,000 investment produces $4,000 of taxable income every year” • “I give $4,000 to charity every year” • “I want to make a charitable bequest of $100,000”

  42. ShiftNet Investment Income Client with $400,000+ of income says: • “My $100,000 investment produces $4,000 of taxable income every year” • “I give $4,000 to charity every year” SOLUTION: LIFETIME GIFT OF $100,000 TO PF or DAF; Shift income • Lifetime income tax deduction produces refund; better than just estate tax bequest • Investment income of PF/DAF not subject to 3.8% NII surtax • Tip: Make gift to DAF of appreciated stock

  43. Reduce Net Investment Income Shift NII to Family/Charity who pay no 3.8% tax [note: trusts do pay 3.8%] Family: Give income-generating investments Charity: #1 – Make gifts of appreciated stock #2 - Donor advised funds & private foundations #3 – Charitable lead trusts

  44. ShiftNet Investment Income Client with $400,000+ of income says: • “My $100,000 investment produces $4,000 of taxable income every year” • “I give $3,000 to charity every year” • “I don’t want a charitable bequest of $100k. Want $100k to go to family.”

  45. ShiftNet Investment Income Client with $400,000+ of income says: • “My $100,000 investment produces $4,000 of taxable income every year” • “I give away $3,000 to charity every year” • “I want family to get the $100,000 investment” CONCEPT: Put $100,000 into a Charitable Lead Trust for a term of years. Whereas donor is paying 3.8% NIIT on all 4%, the CLT would pay only on undistributed 1%. [ PLUS: CLT discount on wealth transfer ]

  46. Reduce Net Investment Income Shift NII to Family/Charity who pay no 3.8% tax [note: trusts do pay 3.8%] #1 – Donate appreciated stock #2 - Donor advised funds & private foundations #3 – Charitable lead trusts COST/BENEFIT – Is administrative cost of PF or CLT worth doing just for 3.8% tax savings? Other benefits are needed. ( Compare: DAF cheap!)

  47. Taxpayers with AGI Near $200,000 Two Ways to reduce the 3.8% surtax : #1 - Reduce Net Investment Income (convert NII or shift NII) and/or #2 – Reduce AGI to less than $200,000 ($250,000 joint)

  48. Taxpayers with AGI Near $200,000 and with lots of Net Investment Income Reduce AGI to less than $200k ($250 jnt) • Reduce NII (see strategies listed earlier) • Avoid large Roth IRA conversions • Maximize compensation deferral -- 401(k) contributions -- Non-qualified deferred comp (Sec. 409A) • “Charitable IRA Rollover”

  49. Taxpayers with AGI Near $200,000 ”Charitable IRA Rollover” - over age 70 ½ • “QCD” – Qualified Charitable Distribution • Have charitable gift made directly from IRA to charity (max: $100,000 /year) • QCD distribution not counted as income (Price? No itemized charitable deduction) • QCD can satisfy annual RMD

  50. REQUIRED MINIMUM DISTRIBUTIONS*LIFETIME DISTRIBUTIONS* Age of Account OwnerRequired Payout 70 1/2 3.65% 75 4.37% 80 5.35% 85 6.76% 90 8.75% 95 11.63% 100 15.88%

More Related