Tax-savvy charitable planning: How to give and receive tax benefits
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Both at the end of the year and in the beginning of the following year, many physicians focus on charitable planning.
In late November and December, the holidays often motivate charitable giving, while in January, a focus on giving can often be part of mapping out the new year’s financial plan. This article discusses the often-complex issue of charitable giving and provides options to consider in 2022 and beyond.
Direct gifts
Direct gifts are gifts made to a charitable organization for their immediate use. The federal tax code provides for current income tax deductions for gifts to charities that have qualified under Section 501(c)(3) as a charitable organization. The tax rules governing charitable giving are somewhat complex. Our explanation is relatively simplistic but should give you a basic understanding.
The IRS distinguishes between “public charities” (universities, hospitals, churches, etc.) and “private charities” (private family foundations, most commonly). What is the difference? If the gift is given to a public charity, you can deduct the amount of the gift as an itemized deduction up to a maximum of 60% of your adjusted gross income (AGI). If the gift exceeds this amount, you can apply the excess as deductions against future years’ income for 5 years. In 2021, under the CARES Act and the Consolidated Appropriations Act, cash gifts to public charities can be deducted to the extent of 100% of AGI.
If the gift is to a private charity, then you can generally deduct a maximum of 30% of your AGI, but any excess also can be carried forward 5 years. Gifts of publicly traded stock to a private foundation can only be deducted up to 20% of AGI.
Indirect gifts
Indirect gifts are often called split interest or planned gifts because some of the benefit from the gift is for the benefit of the charitable organization and some of the assets being gifted will be retained by the grantor (or donor) and his or her family. The real beauty of charitable giving from the family perspective is that the IRS also allows tremendous tax benefits for “indirect gifts” — those left to charity through a trust or annuity. In fact, the IRS also allows deductions for indirect gifts through irrevocable charitable remainder or lead trusts, and through charitable gift annuities, which provide lifetime income to the donor, as guaranteed by the charity and monitored by the state. If you use an indirect gift, charitable planning can truly be a win-win-win situation: you win, your family wins and your favorite charities win.
Common charitable giving scenarios
The following are the most common charitable giving scenarios, where it makes financial sense for a family to consider charitable planning because of the tax benefit:
Sale of a highly appreciated asset. Many physicians, especially those older than 60 years of age, hold highly appreciated assets, which often include real estate or stocks that have grown enormously in value over time. Even more problematic is the case in which there are few assets making up the bulk of someone’s net worth. This is often the case when there is a closely held family business — a situation that is not common among physicians. Regardless of the asset, the owner may want to sell the asset but doesn’t want to pay the capital gains tax, thus reducing the after-tax value of the asset significantly. Through the use of charitable planning strategies, you may be able to unlock some of the appreciation and significantly reduce the capital gains tax while benefiting a favorite charity as well.
Need to generate family income from investment assets. As physicians age and seek to reshuffle their asset allocation to produce more income and diversify their portfolios, they will often be hit with a substantial tax on their gains. By giving to a charity, you have the chance to be creative in your approach to convert paper gains to cash flow, save taxes, and turn nondeductible items into tax-deductible ones while addressing charitable objectives at the same time.
Estate planning. The most powerful benefits of charitable planning can be enjoyed when used as part of a multidisciplinary financial plan. Under current law, your family could pay as much as 40% to 60% in federal and state estate taxes, plus income tax on “IRD” (income in respect of a decedent) assets such as pensions and IRAs. Charitable giving mediates many of these taxes.
Conclusion
If you have a charitable intent and want to reduce current income taxes, capital gains taxes, or even estate taxes, then you should seriously consider charitable planning techniques. Often, you and your family will stand to benefit as much as the charity itself. The right team of advisors can help you understand the costs and benefits of charitable planning and manage the many complex issues. The authors welcome your questions.
For more information:
Wealth Planning for the Modern Physician: Residency to Retirement and Wealth Management Made Simple are available free in print or by ebook download by texting HEALIO to 844-418-1212 or at www.ojmbookstore.com. Enter code HEALIO at checkout.
David B. Mandell, JD, MBA, is an attorney and founder of the wealth management firm OJM Group www.ojmgroup.com, where Carole C. Foos, CPA, is a partner and tax consultant. They can be reached at mandell@ojmgroup.com or 877-656-4362. You should seek professional tax and legal advice before implementing any strategy discussed herein.
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