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Series: Year-End Tax Planning - Part II

11/29/2016

 
In part two of our series on year-end tax planning, we will focus on several aspects of giving and its impact on taxes.  This seems very fitting to me, given the timing.  With Thanksgiving officially in our rearview, we are now fully immersed in the holiday season – some of us have actually been there since November 1st.  Today is also the Tuesday after Thanksgiving, which is known as “Giving Tuesday” – and yes, that is a thing.  As this is a movement that I personally fully support, here is some quick background on it.  “Giving Tuesday” is a movement to create an international day of giving at the beginning of the holiday season.  It was started in 2012 in response to the commercialization and consumerism of the post-Thanksgiving season (Black Friday and Cyber Monday). Also, I recently stumbled upon this quote from Winston Churchill that really resonated with me, and might help put this movement in the proper perspective.
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In this spirit, we will now discuss the various aspects of giving and how an individual might also personally benefit, from a tax perspective.  Not only does giving help those in need and give us a sense of fulfillment, but it can also actually provide a tax benefit.  Year-end is a great time to ensure you are maximizing the tax benefit of your charitable donations. 

Charitable donations are usually deductible up to 50 percent of adjusted gross income (AGI).  If you are near this limit, it is best to review your total gifts versus your income for the year with your tax adviser.  You may find that it is beneficial for you to defer any additional gifts until the next calendar year.  If you are not near this limit, charitable giving can not only lower your tax bill, but it will also help others at the same time.  If you can, give appreciated securities that you have held for more than one year.  This will allow you to deduct the fair market value of the securities and avoid the capital gains taxes.

As mentioned in part one of this series, qualified charitable distributions (QCD) are now a permanent provision.  This provision allows individuals that are over the age of 70 ½ to make donations to a qualified charity directly from their IRA.  The current QCD limit is $100,000 per year, per-taxpayer.  QCDs do not count against the 50 percent deductibility limit, allowing individuals to give large amounts, tax-free.  QCDs also count towards your RMD; but, they do not count as income.  This allows individuals to fulfill their RMD without increasing their AGI.  Reducing AGI can be beneficial for lowering premiums for Medicare Part B and lowering taxability of Social Security, as well.

If you are planning on giving to noncharitable recipients, like family members or other noncharitable organizations, you will need to keep in mind the gift tax limits.  The gift tax exemption for 2016 is $14,000 per person, per year, per recipient.  However, a married couple filing jointly can give up to $28,000 per year to each recipient without any gift tax consequences.  Anything over the limit will be subject to the gift tax or count against the individual’s lifetime gift and estate tax exemption. 

Many individuals also make gifts to 529 accounts either for their children, grandchildren, nieces, and nephews, or for a close friend’s child.  These gifts have the same limitation as noncharitable gifts ($14,000), but you can give up to five years’ worth of contributions at one time without being subject to the gift tax.  This allows the individual to gift up to $70,000 to a 529 account without any tax consequences, as long as there are no additional gifts to that recipient in the next five years.  The deadline for contributions to 529 plans is December 31st.  Please note, that it is also very important to discuss the state deduction limits with your tax adviser, as well.

As you can see, there are many different methods of giving that fulfill any personal obligation you may have, while also benefiting you from a tax standpoint.  As with most things related to finances and investments, it is important to include charitable and noncharitable giving in your plan.  Not only does this hold you accountable for your giving goals, but it also helps you to maximize the tax benefits each year.  In the long run, it can also help reduce the value of your estate, and thus reduce estate taxes.

This wraps up part two of this series on tax-planning.  If you have questions on how you can apply these tactics to your year-end tax planning, be sure to get in touch with your Investment Counsellor and Tax Adviser.



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    Author:
    Christopher J. Blair, CFP®

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