Rows of 100 dollar bills

There’s that pragmatic, and slightly depressing saying that the only sure things in life are death and taxes. But what about taxes on death? Just like you can’t escape taxes in life, they government can tax your estate at death. Indeed, it’s often referred to as the “death tax.”  And, just like taxpayers file both federal and state income taxes, there are both federal and state estate taxes.

People having a meeting at a desk with papers

What is an Estate Tax?

When a U.S. resident dies, an estate tax may be levied against the gross estate, which includes the fair market value (FMV) of all owned property, as well as any assets the deceased had interest in (e.g. assets like life insurance). Think of it like the gross income figure you calculate for income tax returns.

Federal Estate Tax

Let’s start with federal estate taxes. Because this is a federal tax, this applies regardless of what state you die in.

Not too long ago, I reviewed the Tax Cuts and Jobs Act’s (TCJA) impact on estate planning. (Why? Because smart estate planning accounts for taxes and employs strategies that minimize said taxes.) One of the most significant changes from the “new tax law” was with the estate tax exemption. This is the figure subtracted from an estate’s gross value in order to calculate federal taxes.

For tax years 2018 through 2025, the exemption from estate, gift, and generation-skipping taxes was raised from $5.49 million per individual to an approximated $11.2 million. (Why do I say approximated? Because the exemption base is indexed, so the base for the 2017 tax year was $5 million; for the 2018 tax year, the base is now $10 million and indexed for inflation.) In plain terms, this means each individual should be able to pass over $11 million to their heirs before any estate, gift, and generation-skipping taxes apply.

If you’re married, this means your estate exemption now equals $22.4 million. (Or, you could think of it like each couple now has an additional $11.2 million in assets available to gift or make a testamentary transfer with thoughtful estate planning.)

The bottom line: if your estate is worth less than the federal exemption rates, it will be free from the estate taxes after you die. If you have an estate valued at more than the exemption threshold (and smart estate planning strategies are not appropriately implemented to shield assets from being counted in your estate’s gross value), your taxable estate will met with a tax rate of up to 40 percent.

State Estate Taxes

The caveat (and good news for residents of the majority of states) is that not all states have a state estate tax…including Iowa! Currently, 12 states and D.C. also impose an estate tax on residents. It’s important to note that the exemption rates for these state estate taxes are much lower than the federal exemption rate. For instance, our neighbors to the east in Illinois have an exemption rate of $4 million and a graduated marginal tax rate of of o.8 to 16 percent.

Here’s an incredibly helpful map from Tax Foundation that illustrates this.

estate tax map

Note: figures may have changed since time of publication of this map.

Is there any reason an Iowan would need to account for state estate taxes in their estate planning? Only if they own real estate in another state. Let’s consider a hypothetical example to explain this better.

Alice with her Minnesota Lake House

Alice is an Iowa resident. She died in March 2018 owning a vacation home on her favorite lake in Minnesota. Alice’s gross estate totals $2.8 million. What estate taxes will Alice’s estate be responsible for?

Iowa’s Inheritance Tax

While Iowans largely escape the state estate tax, there is a state inheritance tax. The inheritance tax is different than the estate tax (although they they are often incorrectly used interchangeably). The estate tax is based purely on gross value and regardless of who inherits what; the inheritance tax is only charged against the share of inheritance of certain estate beneficiaries.

There’s a lot to note about Iowa’s inheritance tax, so I’ll do a deep dive into that here on the GoFisch blog later this week!

Questions about how taxes (and other fees) may affect your estate plan? Need to revise your current plan after changes to the tax code? Don’t hesitate to contact me via email at gordon@gordonfischerlawfirm.com or by phone (515-371-6077).

The #SweetSixteen is a time of celebration for teams which made the elite group. Similarly, with charitable gift annuities (CGAs), donors can experience the joy of giving to their favorite causes. But, unlike making the Sweet Sixteen, CGAs aren’t hard, they are relatively easy to understand and execute. Also unlike the Sweet Sixteen, CGA donors don’t have to be part of an elite group; all donors, regardless of income, or class, or status, can enjoy the many benefits CGAs offer.

ABCs of CGAs

A CGA is easy to understand, about as easy as a fast break lay-up. A CGA, put simply, is a contract. Specifically, a CGA is a contract in which a charity agrees to pay a fixed amount of money to one or two individuals for their lifetime(s), in return for a transfer of assets (such as, say, cash, stocks, or farmland).

A person who receives payments is called an “annuitant” or “beneficiary.” After the annuitant(s) die(s), or the term of the contract ends, the charity keeps the remainder of the gift.

Sixteen Sweet Benefits of a CGA

Before we go deep into CGAs, I’ve listed 16 key advantages of CGAs.

  1. CGAs are simple to execute.
  2. CGAs are (relatively) easy to understand and explain.
  3. CGAs avoid management responsibilities.
  4. CGAs may be executed during lifetime (called an inter vivos transfer), or by operation of a will (called a testamentary transfer).
  5. CGAs allow a donor to provide a consistent stream of income for others.
  6. CGAs pay lifetime income to one or two individuals, part of which is (most often) a return of principal and free from income tax.
  7. CGAs provide an immediate income tax charitable deduction for the donor for the gift portion.
  8. When appreciated property (such as stock or real estate) is provided to fund a CGA, and the donor is an annuitant, some of the capital gain is spread over the donor’s life expectancy, and the rest is never recognized because it is attributed to the gift portion.
  9. Depending on all the circumstances, CGAs can possibly save a donor taxes on Social Security benefits.
  10. The income payout from CGAs can begin immediately or can be deferred.
  11. The income payout from CGAs is guaranteed.
  12. The income payout from CGAs is fixed (e.g., same amount is paid each payment period).
  13. The charity’s obligation to make the income payout is backed by the general assets of the charity.
  14. For some donors, especially in today’s low-interest environment, CGAs may present an attractive alternative to CDs.
  15. In certain situations, CGAs can supplement retirement income.
  16. CGAs provide the joy of giving to your favorite causes.

basketball court with ball in hoop

Three More Points on the Scoreboard—Three Types of CGA Agreements

1. Immediate Gift Annuity

Under an immediate gift annuity, the annuitant(s) start(s) receiving payments at the start/end of the payment period immediately following the contribution. Payments can be made monthly, quarterly, semi-annually, or annually.

2. Deferred Gift Annuity

Under a deferred payment gift annuity, the annuitant(s) start(s) receiving payments at a future time, the date chosen by the donor, which must be more than one year after the date of the contribution. As with immediate gift annuities, payments can be made monthly, quarterly, semi-annually, or annually.

3. Flexible Annuity

Under a Flexible Gift Annuity (also known as a Deferred Payment Gift Annuity), the donor need not choose the payment starting date at the time of her contribution. The annuitant (who, remember, may or may not be the donor) can choose the payment starting date based on their retirement date or other considerations.

Jump Ball—Choosing Start Date of Deferred CGA

Under an immediate gift annuity, annuity payments begin no later than one year after the initial contribution.

A deferred gift annuity allows the donor to delay the start date of annuity payments. This delay will increase the annuity amount when payments begin and result in a larger income tax charitable deduction which is available in the year of the contribution (subject, as are all charitable donations, to Adjusted Gross Income (AGI) limits).

A deferred gift annuity can produce current tax savings during high-earning years while creating a supplemental retirement income. Generally, the donor sets a date for the deferred gift annuity to begin. However, the IRS approved a deferred gift annuity which did not specify a fixed starting date for the annuity payments [IRS Ltr. Rul. 9743054].

Don’t Foul Out—Charities Issuing CGAs Must Follow Certain Rules

CGAs are an exception to the general rule that charities cannot issue commercial insurance contracts. As such, charities which issue CGAs must comply with several rules. The basics of the rules may be simplified as follows:

  • The present value of the annuity must be less than 90 percent of the total value of the property transferred in exchange for the annuity. In other words, the charitable interest must be at least 10 percent.
  • The annuity cannot be payable over more than two lives, and the individual(s) must be alive at the time the gift annuity is set up.
  • The gift annuity agreement cannot specify a guaranteed minimum, nor a maximum, number of annuity payments.
  • The actual income produced by the property transferred in exchange for the gift annuity cannot affect the amount of the annuity payments.

Four Point Play—Tax Advantages

In basketball, a four-point play is the rare occasion when a player makes a three-point shot while being fouled. Similarly, it is rare for a charitable gift to offer four potential tax advantages to donors, as the CGA does. The CGA can have a positive effect on the donor’s charitable deductions, income taxes, capital gains taxes, and gift taxes.

slam dunk with a basketball

Federal Income Tax Charitable Deduction

A CGA is considered part gift and part sale, as the donor contributes property in exchange for annuity payments from the charity. The donor who itemizes deductions on her taxes may take an income tax charitable deduction for the gift portion (i.e., the value of the transferred property minus the present value of the annuity).

This income tax charitable deduction is subject to the same limits as an outright gift of cash or property. For example, if cash is transferred for the CGA, the limitation of the deduction is 50 percent of the donor’s AGI. Or, if long-term capital gain property is transferred the limitation is 30 percent of AGI. Any deduction in excess of the applicable percentage limitation may be carried forward for five years.

Taxation of Payouts

The annuity payments by the charity under a CGA are treated for income tax purposes as follows:

  1. Tax-free return of principal
  2. Long-term capital gain
  3. Ordinary income

Let’s break each of these categories down.

Tax-Free Return of Principal

A portion of each payment received by the donor, or other annuitant, is a tax-free return of principal until the cost of the annuity is fully recovered when the annuitant reaches life expectancy. Put another way, a portion of the payments is considered to be a partial tax-free return of the donor’s gift, which are spread in equal payments over the life expectancy of the annuitant(s).

The assumed cost of the annuity does not include the gift portion of the transaction. The donor’s cost basis must be allocated between the gift and sale portions in accordance with the respective proportions of the value of the property transferred.

Long-Term Capital Gain

When a taxpayer sells long-term, appreciated property, such as stocks or real estate, she generally pays capital gains on the appreciation. If long-term, appreciated property funds a CGA, a portion of each payment will be taxed as long-term capital gain. This will reduce the income tax-free return of principal portion of the annuity payments.

Under general tax rules, long-term capital gain is recognized in the year the property is sold. Capital gain is recognized only on the sale portion of the transaction and with the basis allocation previously described. However, with a CGA, the donor may spread the gain over life expectancy, assuming either a sole annuitant, or the donor has another individual named as a survivor annuitant. It’s obviously beneficial for a donor to be able to defer capital gains taxes.

Ordinary Income

After the capital gain and tax-free portions of the annuity payment have been determined, the balance of the payment will be taxed as ordinary income.

Gift and Estate Taxation

If the donor is the sole annuitant, there are no gift or estate tax issues because both the annuity is her own and the annuity terminates at death. If the donor names anyone other than herself as an annuitant, gift and estate tax issues may arise.

Regarding the gift tax, if the donor names another person as an annuitant, the gift is the value of the annuity. An exception exists for a spouse under the gift tax marital deduction. Another alternative to avoid gift tax: the donor could retain the right to revoke when the named annuitant has a survivor interest.

Regarding the estate tax, if the donor names another person as an annuitant, the remaining value in the annuity is considered part of the donor’s estate. An exception exists for a joint annuity using only the donor’s life as the measuring life. Of course, there is also an estate tax marital deduction available if surviving annuitant is a spouse.

Low Interest Rates = Higher Tax-Free Income

The Applicable Federal Rate (AFR) selection decision is more nuanced for gift annuities than for other planned gift tools. A donor who wants to maximize their deduction will select the highest rate available, but this reduces the overall value of the annuity and increases the amount of the charitable gift. Conversely, a donor who wants to maximize the income tax-free portion of the annuity payments will select the lowest available rate.

When the Clock Runs Out—Testamentary CGAs

If carefully planned, it is possible to arrange a CGA through a will. The IRS approved a testamentary gift annuity in Ltr. Rul. 8506089. It is of course crucial that both the bequest amount and annuity payout are made clear by the terms of the will.

A donor should engage an expert estate planning expert to handle the careful drafting needed for a testamentary CGA. A donor, together with his estate plan professional, should address two issues:

  1. What if the designated annuitant(s) predecease(s) the testator? (The testator is the person who makes the will).

The donor may want to specify a contingent annuitant, or provide for an outright bequest to the charity.

2.    What about the payout rate?

The donor could (or should) leave the charity some flexibility in the payout rate, to assure the 10 percent minimum charitable interest requirement can be met in the future.

Winning Point

Donors, and nonprofits, can score big with CGAs and this charitable tool can be a slam dunk for all parties.


The mission of Gordon Fischer Law Firm, P.C. is to promote and maximize charitable giving in Iowa. Gordon offers training on complex gifts, like CGAs, for nonprofit boards, staff, and stakeholders. Contact him for a free one-hour consultation. Gordon can always be reached at Gordon@gordonfischerlawfirm.com or at 515-371-6077.

green beer

In the spirit of St. Patrick’s Day, pour yourself a pint, and read up on some simple, yet smart, charitable giving strategies. Whether you want to support the great work of an Oscar Wilde literary foundation or an Irish heritage association, tools and benefits that align with your charitable giving goals can help to stretch your green and make a difference in the causes you care about.

Top O’ the Morning Giving: Now Rather than Later

four leaf clover

It’s been said, “you should be giving while you are living, so you’re knowing where it’s going,” so let’s explore a few options in the case of a hypothetical Irish Iowan, Sinead O’Sullivan.

Sinead O’Sullivan intends to donate to charity eventually, at death through her will and estate plan. But why not give now? Sinead can have more say about use of gifts while she’s alive, and also feel the joy that comes with helping worthy causes. There are also positive tax benefits for Sinead to give now rather than later. Let’s look at these potential positive tax benefits.

Faith and Begorrah: Double Federal Tax Benefit!

Gifts of long-term capital assets, such as stock, real estate, and farmland [where leprechauns may live!], can receive a double federal tax benefit.

First, Sinead can receive an immediate charitable deduction off federal income tax, equal to the fair market value of the stock, real estate, or farmland. Even with the increased standard deduction under the Tax Cuts and Jobs Act (which goes into effect for the 2018 tax year), this is still a valuable consideration give the value of  charitable donation would exceed the standard deduction. (It would be especially beneficially if Sinead is considering “bunching” as a tax saving strategy.)

Second, assuming Sinead owned the asset for more than one year, when the asset is donated, Sinead can avoid the long-term capital gain taxes which would have been owed if the asset was sold.

Guinness door

Let’s look at a concrete example to make this clearer. Sinead owns shares of publicly-traded stock in Diageo (Guinness‘ parent producer and distributor company), with a fair market value of $100,000. She wants her stock to help her favorite causes. Which would be better for Sinead (a single taxpayer) to do—sell the stock and donate the cash, or give the stock directly to her favorite charities? Assume the stock was originally purchased at $20,000 (basis), Sinead’s federal income tax rate is 37%, and her capital gains tax rate is 20%.

Donating cash versus donating long-term capital gain assets  Donating cash proceeds after sale of stock Donating stock
Value of gift $100,000 $100,000
Federal income tax charitable deduction ($37,000) ($37,000)
Federal capital gains tax savings $0 ($16,000)
Out-of-pocket cost of gift $63,000 $47,000

NOTE: ABOVE TABLE IS FOR ILLUSTRATIVE PURPOSES ONLY. ONLY YOUR OWN FINANCIAL OR TAX ADVISOR CAN ADVISE IN THESE MATTERS.

Again, a gift of long-term capital assets, such as stocks, real estate, or farmland, made during lifetime, can be doubly beneficial. Sinead can receive a federal income tax charitable deduction equal to the fair market value of the asset and also avoid capital gains tax.

In Iowa, however, there is even more potential tax benefit.

Saints Preserve Us: 25% Iowa Tax Credit

Under the Endow Iowa Tax Credit program, gifts made during lifetime can be eligible for a 25% tax credit. There are only three requirements to qualify.

  1. The gift must be given to, or receipted by, a qualified Iowa community foundation (there’s a local community foundation near you).
  2. The gift must be made to an Iowa charity.
  3. The gift must be endowed – that is, a permanent gift. Under Endow Iowa, no more than 5% of the gift can be granted each year – the rest is held by, and invested by, your local community foundation.

Let’s look again at the case of Sinead, who is donating stock per the table above. If Sinead makes an Endow Iowa qualifying gift, the tax savings are very dramatic. There are potentially huge tax benefits of donating long-term capital gain assets, such as stocks, real estate, and farmland, while claiming the Endow Iowa Tax Credit:

Value of gift $100,000
Federal income tax charitable deduction ($37,000)
Federal capital gains tax savings ($16,000)
Endow Iowa Tax Credit ($25,000)
Out-of-pocket cost of gift $22,000

NOTE: ABOVE TABLE IS FOR ILLUSTRATIVE PURPOSES ONLY. ONLY YOUR OWN FINANCIAL OR TAX ADVISOR CAN ADVISE IN THESE MATTERS.

Put another way, Sinead made a gift of $100,000 to her favorite charity, but the out-of-pocket cost of the gift to her was less than $25,000.

This is a great deal for Sinead and a great deal for Sinead’s favorite tax-exempt organizations. But, to be a smart donor you must also of course consider the potential areas of caution as well as the benefits.

Endow Iowa: For Good For Iowa For Ever

Cautionary Ballads

The federal income tax charitable deduction is capped. Generally, the federal charitable deduction for gifts of stock, real estate, and farmland is limited to 30% of adjusted gross income. A taxpayer may, however, carry forward any unused deduction amount for an additional five years.

Additionally, records are required to obtain a federal income tax charitable deduction. The more the charitable deduction, the more detailed the recording requirements. For example, to receive a charitable deduction for certain gifts of more than $5,000, you need a “qualified appraisal” by a “qualified appraiser,” two terms with very specific meanings to the IRS. It’s a wise idea to engage the right financial and legal professionals to be sure all requirements are met.

Endow Iowa Tax Credits are also capped – both statewide and per individual. Iowa sets aside a pool of money for Endow Iowa Tax Credits, and it’s available on a first-come, first-serve basis. Submitting an application at the beginning of the tax year is advised, as tax credits often run out toward year’s end. In fact, this year approximately $6 million in tax credits were awarded and there are no more available credits to be granted. However, you can submit your application to be placed on the wait list for 2019 tax credits.

Endow Iowa also has a cap per individual. Tax credits of 25% of the gifted amount are limited to $300,000 in tax credits per individual for a gift of $1.2 million, or $600,000 in tax credits per couple for a gift of $2.4 million.

Finally, all individuals, families, businesses, and farms are unique and have unique tax issues.  This article is presented for informational purposes only, not as tax advice or legal advice. Consult your own professional for personal advice.

Sláinte!

 

rainbow

Our case study subject, Sinead, found the pot o’ gold at the end of the charitable giving rainbow by working with a qualified attorney who specializes in complex donations. You may not be in the same tax bracket as Sinead or have stocks valued at the same rate, but regardless, I would recommend to all donors with large gifts (especially assets of the non-cash variety). Want to discuss your giving goals and options for long-term capital assets? I offer a free consult to all, so don’t hesitate to contact me.

business papers

I write a lot about individuals conducting charitable giving and the various options to do so while living as well as through estate planning means. But, what if you own or run a business and want to make charitable gifts on behalf of the business?

Donations on behalf of a business can be an excellent way to build goodwill, trust, and foster positive public relations. Plus, donations of assets like cash and property can also mean substantial benefits when it comes to filing business taxes.

The good news from the IRS (how often do you hear that?!) is that any business can make contributions to qualified charitable organizations. The caveat is that there are limits on these deductions, and the contributions may only be deductible to the individual owners, not to the business. How the business is categorized is what determines how charitable contributions are deducted and which tax return they are deducted from.

Corporations vs. Sole Proprietorship

Corporation

corporation skyscraper building

Some types of businesses, such as corporations, can deduct allowable charitable contributions directly on their business tax returns. This makes more sense when you consider that the corporation is a separate entity from the owners.

A corporation which files its own tax return can deduct charitable gifts up to 10 percent of its taxable income and is entitled to carryover unused deductions for up to five years.

For a corporation, taxable income for this purpose is calculated without the following:

  • The deduction for charitable contributions.
  • The dividends-received deduction.
  • The deduction allowed under Internal Revenue Code Section 249 [relating to deduction of bond premium on repurchase].
  • The domestic production activities deduction.
  • Any net operating loss carryback to the tax year.
  • Any capital loss carryback to the tax year.

Sole Proprietorship

man standing on street

If you are a sole proprietor, charitable donations can also be tax-savvy, but there are differences from filing as a corporation. Your business taxes are filed on Schedule C of your personal Form 1040 and because of this set-up, your business cannot make separate charitable contributions because the only way individuals can deduct these contributions is on Schedule A. Additionally, you must itemize deductions to take them.

This advice also rings true for a single-member limited liability company (LLC), since this category of business files taxes as a sole proprietor.

What qualifies as a donation?

The IRS specifies that both cash and non-cash contributions from businesses are deductible, as well as expenses related to volunteering.

Cash is self-explanatory, and non-cash donations could be property, goods, and inventory. In terms of volunteering, the time and lost wages are not deductible, but volunteer-related expenses for a qualifying charity event or service project are. This includes the travel costs (like gas and mileage) along with any donated supplies.

What does not qualify as a donation?

Say you run Corporation Smile and your employees are given time off to volunteer with the causes of their choice. Could this time volunteered be considered a charitable contribution? In short, no. As stated above, the value of time volunteered on the ground or, say, on a nonprofit’s board of directors does not qualify. Additionally, many times business-based donations are committed in exchange for something of value. Be it a product or service, the tax-deductible amount is the donation’s value minus the value of the good/service exchanged. (Read my primer on the term “quid pro quo” for more on this concept.)

Qualifying Organizations

In order to claim the charitable donation deduction, the donee organization must be recognized by the IRS as 501(c)(3) nonprofit. This important distinction is what enables these organizations to receive tax-exempt donations. Beware that gifts and donations to political candidates, parties, or associated organizations are not recognized by the IRS as tax-deductible. The same goes for donations to a specific individual. Be smart and practice due diligence in determining which organizations are qualified by asking to see a charity’s IRS determination letter and/or search for qualifying organizations by using the IRS’ Exempt Organizations Select Check tool.

two men talking in booth

Record Keeping for the Win

If you own or manage a business you know all too well how important bookkeeping is, especially come tax time. Record retention for charitable contributions is no different. What documentation required depends upon the amount and type of contributions. (Although, my general advice is to keep more paperwork than needed in regard to contributions.)

  • Donations valued at less than $250– Retain a receipt issued by the accepting charity. If for some reason you don’t have this, a credit card, bank record, or canceled check will suffice.
  • Donations valued at more than $250– Obtain an official gift receipt from the accepting nonprofit.
  • Non-cash donations valued at $250 or less– Taxpayers must receive and keep a letter or other type of written communication in the form of a gift receipt from the charitable organization showing: organization’s name, date and location of the contribution, and a reasonably detailed description of the property donated. The gift receipt for a non-cash donation may or may not include a cash value. If not, the donor will need to see that it is appropriately assessed for fair value.
  • Non-cash donations valued at greater than $250– The gift acknowledgment from the nonprofit must meet the same requirements for contributions of property valued at less than $250, but must also meet several additional requirements. The written acknowledgment must state whether the qualified organization gave any goods or services in exchange for contribution, and include a description and good-faith estimate of the value of any goods and services given.

So, to summarize, the following details should be retained:

  • Name and address of the donee organization;
  • Date and location of the contribution;
  • Reasonably detailed description of the property;
  • Fair market value (FMV) of the property at the time of the contribution and FMV was determined (if the property was appraised, the taxpayer should keep a copy of the signed appraisal);
  • Cost or basis of the property, if the taxpayer must reduce its FMV by appreciation—these records should include the amount of the reduction and how it was calculated;
  • Total amount the taxpayer is claiming as a deduction for the tax year as a result of the contribution; and
  • Terms and/or conditions attached to the contribution.
  • Non-cash donation valued at more than $500 and less than $5,000– Taxpayers must fill out IRS Form 8283 when filing taxes. Taxpayers must have the acknowledgment and written records described above, as well as additional information needed including: how the property was acquired (purchase, gift, inheritance, etc.) and the date the property was obtained by the taxpayer.
  • Non-cash donation worth more than $5,000– In addition to the requirements listed for the smaller donation amounts, you also must obtain a qualified appraisal of the goods and have the qualified appraiser sign Section B of Form 8283. (Qualified appraisal and qualified appraiser are both vague terms with specific meanings to the IRS. Read more about the specifics of these definitions here.)

woman walking against blue window

The charitable deduction for business can result in significant tax savings, just be certain you do so in the right way to maximize the savings. The nuances of corporate/business giving can be complicated and confusing and every business has a unique situation, so be sure to contact the appropriate professional advisors for specific advice. Questions? Comments? I’d love to discuss further; contact me via email or by phone (515-371-6077).

US capitol building against a blue sky with flag

Changes to the tax code can and often do impact estate planning because one of the major goals for most is to reduce or eliminate the taxable amount of the estate. Passed at the tail end of 2017, the Tax Cuts and Jobs Act (otherwise referenced as the new tax law), is no different and there were some major changes that will no doubt impact estate plans moving forward. What did the Act change, what didn’t it affect, and what should you do to maximize your benefits?

Estate Exemption

congress building

One of the most significant changes under the new tax law are the estate-related exemption amounts. The estate tax exemption—or estate tax exclusion as it’s sometimes referred to—is the figure subtracted from an estate’s gross value for the purpose of calculating federal taxes.

This change is one that all estate planning individuals, especially those classified as middle- to high-net worth, need to be aware of. For tax years 2018 through 2025, the exemption from estate, gift, and generation-skipping taxes was raised from $5.49 million per individuals to an approximated $11.2 million. (The exemption base is indexed, so the base for the 2017 tax year was $5 million; for the 2018 tax year, the base is now $10 million and still indexed for inflation.) This means each individual should be able to shelter over $11 million before any estate, gift, and generation-skipping taxes apply.

If you’re married, this means your estate exemption for tax year 2018 now equals $22.4 million. (Or, you could think of it like each couple now has an additional $11.2 million in assets available to gift or make a testamentary transfer with.)

Important Considerations

Other estate planning related taxes

glasses on paper with laptop

None of the estate, gift, or generation-skipping taxes were repealed by the new tax law, and the tax rates for these remains at 40 percent. Just for review: the federal estate tax is applied to the transfer of property at death; the gift tax applies to transfers made while living; and, the generation-skipping transfer tax is applied to transfers of property that skip a generation.

However, these transfer taxes (sometimes referred to as excise taxes) will apply to fewer estates given the major increase to the exemption figures. (The Joint Committee on Taxation estimates the number of taxable estates will drop to 1,800 in 2018, compared with 5,000 estates under the previous tax law.)

Gift tax annual exclusion

Discussing gift tax can be confusing when you consider there is an annual exclusion amount and a lifetime gift tax exemption. Let’s clarify some important points, so you can feel great about gifting to your loved ones!

In the 2018 tax year, the annual gift tax exclusion will be $15,000. This is up from the $14,000 it’s been stuck at for the past half-decade. This annual gift tax exemption is inflation-based, but only raises in increments of $1,000, which is why it took the rate five years to increase.

This means you could gift up to $15,000 to an individual without cutting into the lifetime gift tax exemption. You can give gifts up to that value to multiple individuals. Meaning if you have three adult children and want to gift each of them $15,000 in the 2018 tax year, you could do so and it would be completely exempt from the gift tax. If you’re married (and your spouse consents) you can give a joint gift (otherwise referred to as a split gift) of up to $30,000 per individual in the 2018 tax year.

Let’s say you, as an individual, want to gift a grandchild $20,000. That $20,000 is $5,000 greater than the annual gift tax exclusions and that $5,000 would then be counted toward the lifetime exemption rate (the $11.2 million previously discussed).

Timing

black and white timer

Because the new exemption rates are only instated (as of right now) through the 2025 tax year, on January 1, 2026 the exemption basis will revert back to where it was for the 2017 tax year—$5 million exemption per individual. (Of course, the actual figure will be larger because it will still be indexed for inflation.) Congress could choose to extend this exemption rate past 2025, but they could also choose not to. There could also be further changes to the tax law after future congressional and the presidential elections.

Basis adjustment

There was no change made to the step-up in basis rules. Meaning, when you pass, assets left to beneficiaries are reset to the fair market value at the date of your death. This is a benefit when it comes to taxes for both the whomever inherits the property and helps simplify taxes because there’s no guesswork as to what the property was worth when the testator (the person who made the estate plan) acquired it.

Actions to Take Today

If/when the exemption amounts are reduced, there will be no “clawback,” allowed, meaning that gifts and transfers made up until 2025 will not be later subjected to taxes. That means if the increased exemption rate could have an impact on your estate and allows you to make gifts increased in quantity or value, time is of the essence. Where to start?

woman looking up

Research & consult on your options

There are a few different approaches to gift-giving that could be particularly fitting with the tax changes. Look into establishing and funding a new irrevocable trust or gifting to an existing one. Contemplate how gifts could be applied toward life insurance funding or present sales to trusts. For the charitable-minded individual, the higher exemption amount represents an opportunity for increased philanthropy—consider a tool like a charitable lead trust.

Discuss your options with the appropriate professionals such as your estate planning attorney, financial advisor, and accountant. They’ll be able to advise on tools and strategies you’ve researched, but also provide clear information and counsel of options you didn’t even know about. It’s your professional advisors’ jobs to present you with all the info (benefits and potential detriments) you need to know to make an informed executive decision regarding your estate.

Review estate plan

You should review your estate plan annually regardless of any legislative changes, but with the new tax law you’ll certainly want to review your will, any trust documents, estate planning goals, and overall tax strategies. Again, discuss your options with a qualified estate planner!

Contact me for a free consult

Let’s talk about what the new tax laws mean for you, your family, and your legacy. How can you leverage the increased exemption rate to make a difference in your community? How can you better prepare your heirs when you’re not around to support them and offer guidance? Contact me for a free consultation via email or by phone (515-371-6077).

hand holding flowers

It’s the end of January and that means Tax Day is creeping closer. You tend to hear a lot about what sort activities are tax deductible. You may deduct charitable contributions of money or property made to qualified organizations if you itemize your deductions. And, you’ll certainly want to be aware for substantiation purposes what contributions are indeed deductible.

But, in conquering your charitable giving goals, it’s just as important to know which nonprofit organizations are NOT qualified beneficiaries for tax-reducing gifts. Additionally, not all gifts to qualified charities are eligible. Contributions to certain entities may appear to be tax-deductible, but in actuality are not. This is not to say that these contributions are not valuable and helpful to the respective donees, it’s just that the U.S. government isn’t going to give you a tax break.

Knowing what you can and can’t claim helps you maximize the potential tax savings that the charitable tax deduction offers.

Contributions made to the following are NOT considered viable for the charitable deduction:

Promises and Pledges

man on computer in blue room

Let’s say you made a charitable pledge to a local 501(c)(3) for $150, but only paid $50 in donation during the tax year of the respective tax return. You can only deduct the the $50 actually donated. Once you make the transfer of the rest of the pledge ($100) then you could deduct that from the appropriate tax year.

Political parties, campaigns, and action committees

It’s important to get involved in the process fo democracy, but joining politic through monetary support does not translate into a charitable donation. Funds given to political candidates, parties, and PACs cannot be claimed. This also includes money spent to host or attend fundraising events or advertising.

boy skateboarding with American flag cape

Fundraising tickets

I’m sure you cannot count all the times you’ve been asked to purchase raffle tickets, bingo cards, lottery-based drawings and the like. It’s a common fundraising tactic, but such costs are not deductible.

Personal benefit gifts

The IRS considers a charitable contribution to be one-sided. This means if you receive something in reciprocity for a donation—anything from a tote bag, to a plant, to a three-course dinner—only the amount in excess of the fair market value of the item/service received is deductible. Let’s say your little neighbor is selling popcorn to raise money for their scouting troop. You buy some popcorn from the kid for $10 and the retail value of such a popcorn tin is $6. This donation would translate into a $6 charitable deduction. Likewise, you purchase a $75 ticket to an annual event hosted by a qualified charity. The event includes a meal that would have cost you $30 at a restaurant; overall your charitable deduction would be $45. (Read more about quid pro quo donations here.)

Receipt-less donations

You’ve probably given more than you can write off from small cash donations to your church’s collection plate, the Salvation Army holiday bell ringer, and charity bake sales. Why cannot you just guesstimate, add this all up, and deduct the amount off of your taxes? Receipts. The IRS requires proof of all cash donations big and small; a canceled check, statement or receipt from the recipient organization can suffice for cash donations up to a $250 (in total), and then more substantiation is demanded.

Person-to-Person

I’ve seen many successful crowdfunding campaigns for individuals raising money for a multitude of things. Let’s say your cousin is raising money for an expensive medical procedure through an online site and you donate to help them reach their goal. Or, maybe your nephew is raising money to take a mission trip this summer. Unfortunately and contributions earmarked for a certain individual (despite the economic/medical/educational need) are not deductible, according to IRS Publication 526. However, if you were to make a contribution to a qualified organization that in turn helped your cousin or nephew out with a grant or scholarship, for example, the contribution would be deductible. Make note though, even if you were to give a contribution to a charity in order to help a specific individual, you cannot designate the money to one specific individual for the gift to. Basically the contribution cannot be given directly or indirectly to a specific individual and still be tax deductible.

two people talking

The list could go on for contributions that are not deductible, but some other notable inclusions to be aware of include:

  • For-profit schools (nonprofit schools are good to go so long as donations are not made to benefit a specific individual)
  • For-profit hospitals (nonprofit hospitals are A-OK)
  • Foreign governments
  • Foreign-based nonprofits (with some exclusions for specific nation-states)
  • Fines or penalties paid to local or state governments
  • Value of your time for services volunteered to a charity
  • Value of blood donations (you just need to do that one out of the goodness of your heart…literally)
  • Dues, fees, or bills paid to country clubs, lodges, fraternal orders, or similar groups
  • College tuition (Even if the school is a nonprofit, tuition to attend the school is NOT tax deductible as a charitable contribution)
  • Professional groups/associations (such as civil leagues)

This may make it seem like there are many exceptions to the charitable deduction rule, however there are still an innumerable number of qualified nonprofit organizations that are a good way of reducing taxes (remember, you have to itemize) while also helping others. If you have questions about the charitable contribution tax deduction it’s a good idea to consult with your professional advisors. It’s also a good idea to heed these tips prior to making a charitable donation and double-check the organization’s status on the IRS’ Exempt Organizations Select Check tool, which allows users to search a list of organizations eligible to receive tax-deductible charitable contributions.

I would be happy to have a conversation regarding the tax code, the best time and way to maximize a charitable donation, and help ensure you’re in compliance in compliance with all state and federal laws. Contact me at via email or by cell phone (515-371-6077). 

wall street sign

A less-than-obvious, but ideal asset for charitable giving is appreciated, long-term, publicly traded stock. The merits of this giving tool are numerous, but there are some questions I hear from donors considering this options. For instance, when do you assess the value of a stock donation—before the donation, during, or after? And, how do you determine a specific dollar value on an asset that’s perpetually fluctuating?

Simple Stock Equation

math equation on chalk board

Forget stock charts or complicated formulas, there’s a simple solution. The value of a gift of publicly traded stock is the mean average of the high and low prices on the date of the gift.

For example, Jill Donor gifted 100 shares of Twitter stock to her favorite charity. On the date of Donor’s gift, the high was $25 per share and the low was $23 per share. In this case, the value of a share for charitable deduction purposes would be $23.50 ($25 + $22 divided by 2). The charitable deduction value of Donor’s gift would be $2,350 ($23.50 per share x 100 shares).

Any subsequent sales price, or current valuation (if the charity retains the stock), is irrelevant for valuing publicly traded stock and determining a donor’s charitable deduction. Again, only one factor matters: the average of the high and low selling price of the stock on the date of the gift! Of course, this equation doesn’t account for changes in the stock market in terms of what day would be better to donate over another. For that you’ll need to talk to your financial professional advisor or watch the trends to donate on a date with preferred value.


If you’re interested in gifting stock to a qualified charity, ensure you’re doing so in a way that maximizes all of your financial benefits and contact me for a free consult. Or, if you’re a nonprofit leader wanting to accept gifts of stocks but are unsure of how to facilitate, don’t hesitate to reach out via email or phone (515-371-6077).

church pews

I worry about all the folks going to church this morning. (I use “church” as a term that could be easily replaced with other houses of worship: synagogue, mosque, etc.) Here’s my specific concern: when the collection plate comes around, do folks give cash? Probably. And if so, are they documenting their charitable gift? Probably not. For most people, it’s a $20 here and a $10 there, but over the course of many Sundays that can add up quickly. The total figure of such donations to a tax-exempt organization, like your church, could be claimed as a federal income tax charitable deduction. But, without substantiation, you cannot claim the beneficial charitable deduction.

The IRS requires you to have records and documents backing up your claims of charitable donations. The greater the amount of the deduction you seek, the more records that are required. Let’s start with a basic category: gifts of cash less than $250.

Substantiation requirements for monetary gifts less than $250

wallet with cash money on top

A federal income tax deduction for a charitable contribution in the form of cash, check, or other monetary gift is not allowed unless the donor substantiates the deduction with a bank record or a written communication from the donee showing the name of the donee, the date of the contribution, and the amount of the contribution.

Meaning of “monetary gift”

For this purpose, the term “monetary gift” includes, of course, gifts of cash or by check. But monetary gift also includes gifts by use of:

  • credit card;
  • electronic fund transfer;
  • online payment service;
  • payroll deduction; or
  • transfer of a gift card redeemable for cash.

Meaning of “bank record”

Again, to claim the charitable deduction for any monetary gift, you need a bank record or written communication from the donee. The term “bank record” includes a statement from a financial institution, an electronic fund transfer receipt, a cancelled check, a scanned image of both sides of a cancelled check obtained from a bank website, or a credit card statement.

Meaning of “written communication”

The term “written communication” includes email. Presumably it also includes text messages. But, again, the written communication, whether paper or electronic, it must show the name of the donee, the date of the contribution, and the amount of the contribution.

I must repeat. A federal income tax deduction for a charitable contribution in the form of cash, check, or other monetary gift is not allowed unless the donor substantiates the deduction with a bank record or a written communication from the donee showing the name of the donee, the date of the contribution, and the amount of the contribution.

How about monetary gifts [as defined above] which are $250 or more? As to cash contributions of at least $250, an extra set of substantiation rules apply. Click here to read more.

pulling dollar out of wallet

Responsibility lies with the donor

Interestingly, the responsibility for obtaining this documentation lies with the donor. The donee (the charity) is not required to record or report this information to the IRS on behalf of the donor.

If this sounds like a lot, know you don’t have to navigate these requirements just by yourself. Contact me at any time to discuss your situation and charitable giving goals. We’ll figure out the best course of action together.

hands typing on computer

A cutting edge issue in traditional estate planning is cryptocurrency. “Cryptocurrency” (as defined by Investopedia) is “a digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of this security feature. A defining feature of a cryptocurrency, and arguably its most endearing allure, is its organic nature; it is not issued by any central authority, rendering it theoretically immune to government interference or manipulation.”

The most common, and for now the unofficial standard for cryptocurrency (AKA altcoin) is Bitcoin. But the market is getting increasingly more crowded with others including Ripple, Dash, Litecoin, and Zcash to name just a few. (For the purposes of this article, we’ll focus on Bitcoin, but these points could be applied to cryptocurrencies in general.)

Many posts could be written about cryptocurrency, its benefits and its challenges, but this post is focused on how to account for Bitcoin in your estate plan, as opposed to a standard currency, like the U.S. Dollar.

computer on table

 

Acknowledge the IRS’ Perspective

The IRS has determined, at least for the time being, virtual currency is treated as personal property for federal tax purposes. So, virtual currency transactions are most definitely not the same as, say, online banking through your local community credit union. Instead, for general tax purposes, Bitcoin is treated like tangible property you own, like a painting or a car.

Establish the Existence of Bitcoin

Unlike a checking or saving account. there are no beneficiary designations on Bitcoin accounts. In fact, quite the opposite — Bitcoin is anonymous. Therefore, if you were to die without communicating that you have Bitcoin, it will die with you.

For security reasons, of course you won’t want everyone to know about your ownership of Bitcoin. But you do need to develop a method for passing along the important details to a trusted representative such as your named trustee or executor. This is somewhat similar to accounting for digital assets in your estate plan and many of the same steps/tips apply.

Bitcoin falls into somewhat of a “grey” area outside the realm of a pure digital asset, but it also isn’t a pure financial asset. It might make sense to entrust the existence of Bitcoin to the person you assign to take care of your digital assets, especially if they have a better knowledge base of the what/why/how of cryptocurrency.

Make sure the Bitcoin is Accessible

Unlike a traditional bank account, your executor/trustee can’t just simply contact Bitcoin (as they would your community credit union or bank)  after your death. Your agent must have your private key (or username/password depending on the wallet host) in order to access and then distribute the coin as you’ve determined in your estate plan. Again, if you’re the only person who has access to your “wallet,” the Bitcoin will be forever lost in the network. If you’re comfortable with it, you could include your Bitcoin private key on a secure digital archive site like Everplans or, more traditionally, you could keep the key in a safety deposit box.

Plan for the Prudent Investor Act

Many states, including Iowa, have a version of the Prudent Investor Act. (The text of Iowa’s law can be found under the Iowa Uniform Prudent Investor Act.) Under the Act, if you die with a large reserve of Bitcoin, it could be considered an “investment” which the trusted agent could be required to sell and/or diversify. In the face of uncertainty, it’s always better to account for contingencies in your estate plan before your loved ones are faced with a bad scenario. If one of the goals of your estate plan is to grant your executor/trustee the ability to hold your Bitcoin long-term, then it’s wise to include specific language in your will or trust absolving the executor/trustee from liability if they “fail” to diversity your Bitcoin.

U.S. capitol building

Think About Taxes

If your executor/trustee retains your Bitcoin it would not be considered income (at least at the time of this post’s writing). However, if Bitcoin is converted to cash following your passing, it must be declared as income on an estate tax return. Additionally, if your executor were to retain Bitcoin, see it appreciate in value, and then sell it, there is the issue of the capital gains tax. (“The IRS requires American resident taxpayers to report Bitcoin trading income and losses worldwide on U.S. resident tax returns.”) Consider this in your directive of how you would like your Bitcoin to be managed in event of your death.

Fair Market Value: Step Up or Down

data on computer

The fact that Bitcoin is currently considered personal property means evaluating for either a step-up or step-down in basis given the fair market value on the date of death. (I write more on this in regards to four different types of assets here.)

Let’s consider the hypothetical where Betty inherits 100 Bitcoins (BTC) from Amy. At the time of Amy’s death 1 BTC is worth $50 and when Betty goes to spend 1 BTC, it’s worth $60. That means Betty’s taxable gain on the use of the Bitcoin is $10. How much Amy initially paid for the 100 BTC is irrelevant. Again, the only relevant factor is the fair market value on the date of Amy’s death. It’s wise, as part of your estate planning, to consider your Bitcoin’s depreciation or appreciation to determine how this may affect your heirs. It’s even more wise to discuss your individual situation with professional tax and financial advisors, as well as your estate planning attorney.

Estate Planning is a Must, not an Option

It’s likely we’re going to only see more unique situations, such as that which cryptocurrency presents, in the future.While the future value of Bitcoin may be uncertain, for certain you need an estate plan, and you shouldn’t let your investment die with you. If you already have an estate plan, it’s probably a good time to revisit it to ensure it accounts for assets like Bitcoin. Email me or give me a call (515-371-6077) with questions or to discuss your digital estate planning needs.

red ornaments Endow Iowa Tax Credit

Merry Christmas Eve and thank you for reading the 25 Days of Giving series! In the spirit of the holiday season I’m covering different aspects of charitable giving…perfect to get you thinking about your end-of-year giving.

There are many, many reasons Iowa is great place to live and work. One reason is the Endow Iowa Tax Credit Program—a smart way to stretch your charitable dollars. Iowa community foundations provide exclusive access to the Endow Iowa Tax Credit program. Giving through the Endow Iowa program allows Iowa taxpayers to receive a 25% Iowa tax credit, in addition to the federal charitable income tax deduction, for qualifying charitable gifts.

gift with glitter ribbon

The Endow Iowa Tax Credit Program provides unique opportunities to meet philanthropic goals while receiving maximum tax benefits. Highlights of this program include:

  • A variety of gifts qualify for Endow Iowa Tax Credits including cash, real estate, grain, appreciated securities, and outright gifts of retirement assets. In fact, appreciated assets, like stocks or real estate, can provide even better value because the donor may avoid capital gains taxes.
  • To be eligible, gifts must benefit an Iowa charity.
  • Tax credits of 25% of the gifted amount are limited to $300,000 in tax credits per individual for a gift of $1.2 million, or $600,000 in tax credits per couple for a gift of $2.4 million, assuming both are Iowa taxpayers.
  • Eligible gifts will qualify for credits on a first-come/first-serve basis until the yearly appropriated limit is reached. If the current available Endow Iowa Tax Credits have been awarded, qualified donors will be eligible for the next year’s Endow Iowa Tax Credits. Donors should be encouraged to to act as early in the year as possible to ensure receipt of credits as soon as possible.
  • All qualified donors can carry forward the tax credit for up to five years after the year the donation was made.

There is one “catch.” Funds can only be granted at a spend rate of 5% per year. It should also be noted that the Endow Iowa Tax Credits are capped. The Iowa Legislature sets aside a pool of money for Endow Iowa, and it’s available on a first-come, first-serve basis. Submitting an application at the beginning of the tax year is advised, as tax credits often run out toward year’s end. In fact, this year approximately $6 million in tax credits were awarded and there are no more available credits to be granted. However, you can submit your application to be placed on the wait list for 2018 tax credits.

In exchange for 25% Iowa tax credit and the opportunity to have an even greater impact on their philanthropic interests in the state of Iowa, now and into the future, the Endow Iowa Tax Credit Program should be seriously considered by all. Any questions or thoughts on how the Endow Iowa Tax Credit Program could mean big benefits for your finances and your state? Don’t hesitate to contact me.