Many individuals are not sure how the 2017 Tax Cuts and Jobs Act (TCJA), effective January 1, 2018, impacts their current income tax situation, charitable contributions and legacy planning. In the midst of these changes, now is a good time to reflect on why we give.

We give back from a deeply personal sense of gratitude and the grace that flows from a life of stewardship. Think of the following when you plan your charitable giving:

1. Your love for God. Giving is a form of prayer. To give is to express your love for God.
2. Your love for people. You are a person of worth and dignity, surrounded by people of worth and dignity.
3. Your love for our Church. It is our community of togetherness in Christ.

Giving is an act of faith.

Now is an appropriate time to prepare a tax and charitable giving strategy for 2019 and beyond. The Catholic Foundation of Michigan is a great resource to help you develop a gifting plan. Below are several income tax and legacy planning strategies:

Income Tax Strategies

STANDARD DEDUCTION AND “BUNCHING”

The standard deduction has nearly doubled to $12,000 for singles and $24,000 for married couples who file jointly. Therefore, itemizing deductions (typically mortgage interest, state and local income and property taxes up to $10k total, charitable contributions, and medical expenses if above adjusted gross income threshold) may not be deductible if you don’t exceed the above itemized thresholds. To boost the tax benefits of charitable giving, one can “bunch” donations into alternating tax years to surpass the thresholds and receive the deduction.

Capital gain strategies

Contributing stocks, bonds or mutual funds that have appreciated over time can be donated without having to sell them and recognize the capital gains. This could potentially save up to 20 percent in taxes.
In addition, you may be eligible to pay 0.00 percent in federal taxes on long-term capital gains depending on your income level.
(Single taxpayers up to $38,600 in income and married, filing jointly taxpayers up to $77,200 in income.)

Action: Review appreciated investments and determine if you should donate securities in-kind to a charity like the Catholic Foundation rather than selling them and writing a check.

With the Catholic Foundation, it is easy to create a donor advised fund, endowment fund, family fund or give directly to charity. 

QUALIFIED CHARITABLE DISTRIBUTION STRATEGY FROM AN IRA

Anyone 70 ½ years or older can donate up to $100,000 annually to a public charity directly from their individual retirement account (IRA). With this strategy, an individual could reduce taxable income and still utilize the higher standard deduction.

Action: Are you receiving required minimum distributions (RMD) or need to take them soon? Also, it may be more advantageous to donate appreciated securities from your taxable portfolio through creating an endowment for a beloved charitythan to donate directly from the IRA.

Legacy Planning Strategies

STEPPED-UP BASIS

The estate tax exemption for 2019 is up to $11.4 million per individual. That means most individuals will not be subject to the 40 percent estate tax if their lifetime gifts and assets transferred to non-spouses at death do not exceed that amount. The other primary benefit to this high exemption amount is that the step-up in basis for appreciated assets is still allowed for income tax purposes.
Most individuals’ estate planning now will be able to hold assets until death in some form (individually with TOD or POD designations, jointly, or trusts) so that the basis is stepped-up to fair market value at death.

By holding an appreciable asset until one’s death, the beneficiary’s basis is automatically increased to the current market value (stepped-up). As a result, no estate tax is owed at the time of death and any future income tax obligations will be calculated based on the beneficiary’s stepped-up basis.

If an individual sold the asset before death, they could potentially pay up to 20 percent in capital gains tax on that appreciated asset, plus 3.8 percent net investment income tax.

If an individual makes a gift of the appreciated asset to a beneficiary before death, the basis is not stepped-up, and the beneficiary would receive the individual’s holding period and cost basis. The beneficiary would then have to pay capital gains tax when they sell the asset.

Action: Review estate plan and identify family goals. Then, determine how to position assets for charitable, income tax and legacy planning.

CHARITABLE REMAINDER TRUST

A charitable remainder trust (CRT) is an irrevocable trust that generates a potential income stream for you, as the donor to the CRT, or other beneficiaries with the remainder of the donated assets going to your favorite charity or charities at a future point in time.

This charitable giving strategy generates income and can enable you to pursue your philanthropic goals while also helping provide for living expenses. Charitable trusts can offer flexibility and some control over your intended charitable beneficiaries as well as lifetime income, thereby helping with retirement, estate planning and tax management.

Action: Do you have highly appreciated assets, want an income stream and desire to give to charity? There are other trust strategies that may meet your needs and the Catholic Foundation of Michigan can review these with you.

It’s important to remember that there are other legacy strategies in addition to the ones listed and there are numerous factors that would determine the best overall structures of your estate plan.

As you prepare or review your 2018 tax return, think of some of these strategies and how you can maximize your gifts to your favorite charities and spread the Catholic faith. The Catholic Foundation of Michigan is available to provide solutions and guide you through this complex process.

Authored by Preferred Professional Advisor Group members:

*Thomas W. Wiggins, CFP®, M.S.M
39300 W. Twelve Mile Rd, Suite #100
Farmington Hills, MI 48331
(248) 579-1212
thomas.wiggins@rehmann.com

*Securities offered through Rehmann Financial Network, LLC, member FINRA/SIPC. Investment advisory services offered through Rehmann Financial, a Registered Investment Advisor

Craig Mathiesen, CPA, CGMA, MST
39300 W. Twelve Mile Rd, Suite #100
Farmington Hills, MI 48331
(248) 579-1125
craig.mathiesen@rehmann.com