Blog Author: Stephen C. Hartnett, J.D., LL.M. (Tax), Director of Education,
American Academy of Estate Planning Attorneys, Inc.
As we gather around the Holiday table, we see the faces of our loved ones and we contemplate how grateful we are for them and for all our blessings.
“We must find the time to stop and thank the people who make a difference in our lives.” – John F. Kennedy, 35th President of the United States.
“If you are really thankful, what do you do? You share.” — W. Clement Stone, businessman, philanthropist, and author.
There are different ways we can share. We can share with those closest to us, our loved ones. Or, we can share with the broader world through charity. Either can have a great impact.
If you want to share with your loved ones, you can give $15,000 to each person each year without it counting against the total amount you can give during life or at death without gift or estate taxation. If you expect your loved one might have education expenses in the future, a 529 plan is a perfect way to make this gift. With a 529 plan, the earnings are tax-deferred and, if used for qualified education expenses, they aren’t taxed even when they are distributed. In some states, the contribution to the 529 plan qualifies for an income tax deduction for the donor.
If your loved one has special needs and became disabled prior to age 26, you may want to contribute to an ABLE account for them. An ABLE account is a special account for a disabled person that won’t count against their qualification for Medicaid benefits. Further, if the account has less than $100,000, it won’t count against their qualification for SSI either. The earnings on the ABLE account are tax-free if used for qualified disability expenses, which are defined very broadly. Unlike IRAs or 529 plans, a person may have only one ABLE account.
If you want to share more broadly, you can give to charity. If you give cash to a public charity, like your alma mater or your church, it’s deductible for income tax purposes up to 60% of your adjusted gross income. If you give appreciated property to the same organization, it would qualify for a charitable deduction up to 30% of your adjusted gross income. Since you’ve never paid tax on the appreciation, you’re really getting a great benefit by being able to deduct the value of the property including the appreciation.
Let’s look at an example. Let’s say you give property valued at $100,000 and for which you paid $20,000. If you sold the property, you’d pay a tax on the difference, $80,000. The tax rate varies, but let’s assume your combined state and federal tax rate on capital gains is 25%. You’d pay $20,000 tax on that gain. However, if you give the property to charity, you’d get to deduct the entire $100,000, not just what you originally paid. If your combined state and federal tax rate is 40%, that deduction could save you $40,000.
The amount you can deduct without itemizing deductions doubled in 2018. If your deductions don’t exceed the standard deduction amount, you may want to “bunch” charitable or other deductions to get the most bang for your buck. The standard deduction for a single taxpayer in 2018 is $12,000, while it is $24,000 for a married couple filing jointly. Let’s say you’re single and have other itemized deductions (like mortgage interest, property taxes, and state income tax) of $10,000. You want to give $2,000 a year to charity. If you do so, there would be no tax benefit because you’d get to deduct $12,000 either way. However, if you bunch the charitable deductions into one year by giving $10,000 every five years, you’d have $20,000 of deductions in year one and you’d still have $12,000 of deductions in the other four years due to the standard deduction amount.
Giving to your loved ones and charity can be a great way to express your gratitude. Doing it in the most advantageous way is only smart.
The Litherland Law Firm is a member of the American Academy of Estate Planning Attorneys. If you would like to learn more about the importance of estate planning, we invite you to attend one of our free estate planning seminars.