BY ROGER R. YERGEAU
Most of us are now concerned about having our 2014 income taxes prepared by April 15. As you prepare to file, it might be the time to reduce your 2015 tax burden with the use of charitable planning.
Taxpayers now have had two full tax years under the American Taxpayer Relief Act of 2012. Different groups have seen different effects on their income tax burden under the 2012 law. The tax act change implemented higher income tax rates for upper-income taxpayers and modest changes for itemized deductions. Charitable gifts deductions were not changed, leading upper-income taxpayers and their advisers to recognize the need to reduce income taxes through the use of prudent charitable planning.
Charitable planning can help relieve some of the burden placed on the taxpayer due to the following:
Ӣ Income taxes. Upper-income taxpayers have seen their top tax bracket raised to 39.6 percent. Should an upper income taxpayer have passive income, the Medicare tax of 3.8 percent will be added, making the top federal tax bracket 43.4 percent.
Ӣ Capital gains tax. Currently there are three capital tax rates: 0 percent for low-income taxpayers, 15 percent for midlevel taxpayers and 20 percent for top-tier taxpayers. The Medicare tax of 3.8 percent is added to the applicable tax rate, thus raising the top capital gains rate to 23.8 percent. The taxpayer who has significant capital gains is also likely to be in the top income tax bracket.
Ӣ Appreciated property. Many taxpayers have appreciated property and are reluctant to sell when they would have to pay top capital gains tax rates. Last year, home prices increased by 11 percent and the Dow Jones industrial average reached 18,000. With the large tax burden, taxpayers may feel they are locked in with the appreciated assets.
Tax strategies for 2015
For the past several years, Congress has extended the option for IRA owners older than age 70½ to give up to $100,000 to a charity through an IRA custodian-to-charity transfer. The latest extension ended on Dec. 31.
Congress at the last minute last year almost passed the Supporting America”™s Charity Act. This act would have permanently extended the IRA charitable rollover and even expanded limits for conservation gifts and gifts of wholesome foods. There was strong bipartisan support for the bill but it failed to pass due to Congressional procedural rules.
Watch for possible passage of this bill in 2015 or another annual extension. If extended, it gives taxpayers a couple of different forms of income tax relief. Since the IRA rollover is direct from the IRA custodian to the charity, this will not be included in the taxpayer”™s taxable income. The alternative minimum tax exemption is being phased out for higher-income taxpayers. Thus, the use of an IRA rollover prevents these funds from being subject not only to income taxes but to the alternative minimum tax. Not having to add the minimum required distribution to one”™s income through the use of the IRA charitable rollover will substantially lower the tax burden for many taxpayers.
Another thing to consider is that gifts of appreciated property or stocks bypass capital gains and are deducted based on the assets”™ fair market value. The taxpayer should keep in mind the 30 percent limit of adjusted gross income when making gifts of appreciated assets.
Once a taxpayer has used 30 percent of adjusted gross income in gifts of appreciated assets, he may want to consider using cash gifts of up to 20 percent of adjusted gross income. The combination of 20 percent of AGI (cash gifts) and 30 percent of AGI (appreciated property) will give taxpayers in the upper brackets the maximum income tax savings of 50 percent.
Roger R. Yergeau is a retired principal partner of Agent Support Group, a life insurance brokerage in Elmsford. He is the volunteer director of planned giving for the Open Door Foundation Inc. in Ossining. He can be reached at ryergeau@odfmc.org.
