CHARITABLE
GIVING –
An Overview
© Zen of Wealth
llc , 2015
”…only the little people pay taxes.”
Leona Helmsley
(1920-2000)was a big shot in NYC real estate. She reportedly said,
”…only the little people pay taxes.”
Actually her housekeeper
testified in court that she heard Leona say this.
Regardless, Leona not only talked the talk,
she walked the walk, serving 9 months in prison for tax evasion.
Leona is nobody’s
role model, but, in her felonious way, she had a point.
There are so many
areas where the Tax Code doles out tax goodies, that most of us probably pay
more in income taxes that we need be paying.
Tax
considerations are important in everything we do at Zen of Wealth.
At Zen of Wealth,
one of our missions to help our clients be Tax Aware and Tax Smart.
Here’s a crib
sheet on the 16 largest Tax Goodies in our Tax Code.
Areas where Zen of Wealth actively works with
clients are marked by *
| AMERICA's BIGGEST TAX BREAKS | ||||||
| $ Billion | $ Billion | |||||
| 2015 | 5 yr 2014-2018 | |||||
| 1 | Health Care Benefits | * | $194.8 | $1,009 | ||
| 2 | Qualified Retirment Plans | * | $112.3 | $700 | ||
| 3 | Long Term Capital Gains & Dividends | * | $120.3 | $633 | ||
| 4 | Mortgage Interest | $74.8 | $405 | |||
| 6 | Municipal Bond Income | * | $65.8 | $356 | ||
| 5 | Earned Incoome Tax Credit (EITC) | $70.4 | $353 | |||
| 7 | Local Income Tax | $59.2 | $316 | |||
| 8 | Credit for children under age 17 | $57.3 | $286 | |||
| 9 | Charitable Donations | * | $45.4 | $252 | ||
| 10 | Untaxed Social Security Benefits | $39.3 | $209 | |||
| 11 | Step Up Basis upon death | * | $31.5 | $175 | ||
| 12 | Deferred Tax on Insurance & Annuity growth | * | $28.1 | $158 | ||
| 13 | Deferred Gains on sale of primary Residence | $27.4 | $149 | |||
| 14 | Deferrals on Gains on Like-Kind exchanges | $6.1 | $99 | |||
| 15 | Employer paid transportation benefits | * | $5.0 | $26 | ||
| 16 | Premiums on Group Term Life Insurance | * | $4.1 | $21 | ||
| TOTAL TAX "BREAKS" | $927 | $5,001 | ||||
| source: Joint Committee on Taxation, staff report JCX97-14 | ||||||
This is a
serialization of a longer article that I and my co-author, Steven P. Holt, a
tax, trust and estate planning lawyer, wrote for a Foundation.
Over the coming
weeks we will be posting a series of a chapters describing the various
strategies of Charitable Giving.
In Chapter 1, we
discuss an over-view of Charitable Giving, the pre-giving Strategic planning
process, and the tax advantages of Charitable Giving.
Thank you for your interest. We welcome your
comments and feedback.
Thank you
chester m.
rothman
founder, Zen of
Wealth llc
like us on Facebook, Zen of Wealth
About the
Co-Authors:
Chester Mayer
Rothman is the founder and chief wealth strategist at Zen of Wealth llc., a wealth strategy
firm in Jersey City, N.J. Chester studied for his BBA at the University of
Wisconsin (Madison) and his MBA at the Wharton School. Chester’s background is on Wall St.,
specializing in analyzing complex investment opportunities His prior employers
include Prudential Insurance Company, Merrill Lynch and Lehman Brothers. In
1991, he founded Wenroth Capital (the predecessor entity to Zen of Wealth llc
), an investment management firm focused on investing in merger arbitrage,
turnaround and restructuring opportunities. Chester speaks on life and health
insurance and creating wealth with tax smart wealth strategies. He also mentors new business owners and
non-profit organizations at the NJCU Bujsiness Developoment Centre. Chester was
appointed by Jersey City Mayor Steven Fulop to the Jersey City Public Safety
Advisory Board.
Steven P. Holt
Esq., is a shareholder and Chair of the Trusts and Estates Department at
Mandelbaum Salsburg, P.C., a law firm in Roseland, N.J. Steven received a BBA degree from the
University of Wisconsin (Milwaukee), his law degree from Rutgers, The State
University of New Jersey School of Law — Camden, and an L.L.M. in taxation from
the New York University School. Steven
concentrates his practice in the areas of sophisticated estate and family
wealth transfer planning, asset protection planning and tax law. Steven
is a member of the board of directors of the Ben Appelbaum Foundation, an
organization that mentors new business owners and startup charitable
organizations.
Chapter 1
CHARITABLE GIVING – An OVERVIEW
Philanthropy is
about more than giving money — it is about pursuing goals of great personal
importance. Philanthropy provides a
unique opportunity to enrich your life, while enriching the lives of so many
others.
Whether you
cherry pick one-off donations or wish to establish a legacy of giving, perhaps
through a family foundation, you will find a manner and method of giving to
suit your needs and goals.
In Chapter 1 we
give you an overview of Charitable Giving, the pre-giving strategic planning
process and the tax advantages of charitable giving.
Without private giving charitable
organizations would not survive
The National
Philanthropic Trust reports there were $358.34 billion in charitable donations
in 2014, with individuals giving $258.51billion, 72% of the total.
Charitable Giving has the power to change
lives for generations to come
* Those too poor
or too politically marginalized would have an even smaller voice.
* Tragic events
would become even worse disasters, without the likes of the Red Cross.
* For lack of
medical research, illness would spread and suffering would be prolonged.
* There would be
fewer houses of worship.
* There would be
fewer private colleges.
* There would be
fewer cultural venues, museums, operas and symphonies.
Some amazingly
durable institutions were the result of gifting (even before the income
tax). Here are a few
that have endured for over 120 years.
1860 Boys & Girls Club of American (Mary &
Alice Goodwin, Liz Hammersley)
1863 National Academy of Sciences (President Abraham
Lincoln)
1866 ASPCA
(Henry Bergh)
1877 Fresh Air Fund (Rev. Willard Parsons)
1881 American Red Cross (Clara Barton)
1881 Tuskegee University (Booker T. Washington)
1885 Stanford University (Leland Stanford, 8000
acres of land)
1888 National Geographic Society
1888 United Way (F. Jacobs, Rabbi Friedman, Rev. M.
Reed & Msgr. Wm. O’Brien)
1889 University of Chicago (John D. Rockefeller)
1889 The First Carnegie Library (Andrew Carnegie)
1892 Sierra Club (John Muir)
Charitable Giving
supports your Personal Passions
Andrew Carnegie
(1835-1919) became the richest man in the world, when, in 1901, he sold
Carnegie Steel to J.P. Morgan for $490 million dollars. For the next 20 years Carnegie focused on
giving away his money. All the world knows Carnegie Hall in New York City.
TIAA-CREF, created to give teachers a secure retirement, was initially funded
by a Carnegie foundation; as was Pittsburgh’s
Carnegie-Mellon University. Carnegie money built 1,687 free public libraries,
kick starting the system of free public libraries in America. Today the
Carnegie Corporation and various Carnegie Foundations are actively involved in
issues of education, immigration and global peace.
The John D. &
Catherine T. MacArthur Foundation is perhaps best known for its
no-strings-attached fellowships to individuals who "show exceptional merit
and promise for continued and enhanced creative work.” The media commonly refers to these grants as
“MacArthur Genius Awards.” MacArthur
made his money in insurance and real estate. In 1970, when John D. was 73, he
and Catherine formed their foundation, so that their good works would continue
in perpetuity.
What kid hasn’t
contributed a dime or two to the March of Dimes? Did
you know the predecessor organization to the March of Dimes, the National
Foundation for Infantile Paralysis, was formed by President Franklin D.
Roosevelt in 1938?
Bill Gates &
Paul Allen founded Microsoft in 1975. $2,100 invested in 100 shares of
Microsoft at the $21 IPO, on March 13,1986, is worth over $1.5 million today.
Bill Gates was
America’s richest person in 2000, when he and his wife, Melinda, created the
Bill & Melinda Gates Foundation. Today, their foundation is the largest
private foundation in the world, with over $40 billion in assets.
Their mission is
to attack, globally, problems of Health and Poverty, and Education.
CHARITABLE
GIVING - WHAT’S RIGHT FOR ME ?
KEY STRATEGIC
CONSIDERATIONS
In broad terms,
there are two ways to give. You can give to established public charities or you
can form your own Private Charitable Foundation.
Charitable Giving
can be quite easy. Just pull out the
checkbook and write a check. Or it can become increasingly more sophisticated,
perhaps a multi-year benefactor relationship, or creating a Charitable Trust,
or even a Family Foundation establishing a Giving Legacy for future generations
of your family.
Creating a
Private Foundation is complicated, both operationally and tax-wise. But a Private Foundation gives you the
opportunity to create a perpetual legacy, to involve family in the
decision-making and gives you the freedom to “think out of the box.”
Once you decide
to Give, our work begins.
Together we
work through the strategic and tax choices to create your unique Giving
Strategy.
We begin the
planning process by asking you to answer these questions:
Do I want to Give
During My Lifetime and enjoy, daily, the full pleasure of giving ?
or
Do I want to Give
Later ?
Do I Want to
receive an income stream from my gift ?
or
Do I want to
retain a reversionary interest in my gift ?
Do I want to
Relinquish All Control over my gifted Assets ?
or
Do I want to
Retain an say in how in the Gifted Assets are deployed ?
&
Does my Family
Wish to remain Involved in Charitable Giving ?
&
Do I have
Appreciated Assets to donate
The answers to
these questions, combined with our thorough analysis of your current and
projected personal, family and business situations go a long way to defining
your optimal Giving Strategy.
Next we work with
your legal and tax advisors to fine tune your Giving Strategy and create your
Giving Plan, one that optimizes the balance among your Giving intentions, your
financial and family situations, and the tax advantages available to you.
THE IRS LOVES
CHARITABLE GIVING
1. Current year
charitable tax deduction, reduces your taxable income.1
2. Avoid Capital
Gains Tax 2 When gifting appreciated assets, you can receive a Charitable
Deduction for the fair market value of the assets, obviating any tax on the
unrealized gain.
3. Reducing Estate
Tax, donated assets are removed from your taxable estate.
The Tax Code
deduction for charitable contributions makes Uncle Sam your partner in giving,
significantly reducing your net after tax cost of giving.
In 2014,
individuals gave $258 billion in charitable contributions, generating tens of
billions of dollars in government support thru the charitable contribution tax
deduction.
EXAMPLE: TAX
DEDUCTION DYNAMICS – CASH DONATION
This taxpayer is
in the 39.6% tax bracket and makes a cash donation of $100,000 to his or her
favorite charity.
The contribution
reduces the taxpayer’s Federal income tax by $39,600 ($100k x 39.6%). Deduction
limited to 50% of AGI, with a 5 year carry-forward.
| The Tax Math of Charitable Giving | ||||
| Taxable Income -AGI | $750,000 | $750,000 | ||
| Charitable Contribution ($) | $100,000 | |||
| Taxable Income-2 | $750,000 | $650,000 | ||
| Federal Tax Bracket | 39.6% | 39.6% | ||
| Tax Due | $297,000 | $257,400 | ||
| Taxes Saved | $39,600 | |||
| Your After Tax Contribution | $60,400 | |||
| Charitable Contribution ($) | $100,000 | |||
Only $60,400 of
your $100,000 charitable contribution is YOUR after tax money. Uncle Sam has kicked in the other
$39,600, through your Tax Savings.
You enjoy the glory of the full $100,000 donation !
The Giving gets
even better when you donate appreciated assets.
When you gift
appreciated Capital Gain assets 2 your charitable donation is valued at the
current market price of the donated assets. You will not pay a capital gains
tax on the unrealized appreciation.
The receiving
charity can liquidate the gifted assets at the current price and will not pay
any tax on the unrealized appreciation.
Gift of
Appreciated Securities in a Public Corporation
Your charitable deduction is valued at 100%
of Fair Market Value. The Deduction is limited to 30% of AGI (20% if donated to a Private
Foundation) in any one year, with a 5 year carryforward.
Gift of
Securities in a Closely Held Business 3
Your charitable
deduction valued at 100% of (appraised) Fair Market Value.
The Deduction is
limited to 30% of AGI, (20% if donated to a Private Foundation) in any one
year, with a 5 year carryforward.
Gift of
Appreciated real estate 3
Gift of Art 3
Always seek the
counsel of your tax and legal advisers before gifting.
EXAMPLE: THE TAX
DEDUCTION DYNAMICS – APPRECIATED stock
This taxpayer is
in the 39.6% tax bracket and donates $100,000 of appreciated stock in a public
company.
The cost basis of the stock is
$10,000. There is an unrealized capital gain of $90,000.
The contribution
reduces the taxpayer’s Federal income tax by $39,600 ($100k x 39.6%). Donation
to public charities are limited to 30% of AGI, 20% to private foundation.
In addition, the
donor will not have to pay the capital gains tax on the $90,000 of unrealized
capital gain. At this income level, the
Capital Gains tax rate is 23.8%. By
donating the shares, rather than selling the shares, the donor avoids paying
$21,420 in capital gains tax.
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When gifting
appreciated public company stock, the Donor benefits from two tax savings,
$39.600 of income tax saved from donating $100,000 of stock and $21,420 of
capital gains tax not paid. The charity can sell the stock and use the full
$100,000.
In this scenario,
the Donor’s after-tax cost of the $100,000 donation is only $38,980. Compared to
$60,400 if the donation were in cash.
Either way, you
enjoy the glory of the full $100,000 donation !
In Chapter 2 we
will look at the various Giving Strategies and discuss how to match your needs
to the right strategy.
cmr
16 November 2015
1. Cash contributions. In any one year, you may deduct charitable
contributions of cash to public charities up to 50% of your AGI, 30% of AGI for
contributions to private foundations. Any unused deduction, can be carried
forward and used over the next 5 years.
2. A Capital Gain Asset is “any capital asset
the sale of which at its fair market
value at the time of it’s the contribution would have resulted in a gain that
would have been a long-term capital gain” [ IRC 170(b) (1)(c)(iv) ]. Deductions are limited to 30% of AGI to
public charities and 20% of AGI for contributions to private foundations.
3. Tax treatment of donated securities in a
private business, and gifts of appreciated real estate and works of art are
complex and quite specific to the individual donation.
U.S. Code § 170 –
Charitable contributions and gifts
Disclaimers
This article is
distributed for informational purposes only. Information contained herein has
been obtained from sources believed to be reliable, but not guaranteed.
Please seek out
capable accounting and tax advice before making any decisions.
This article
contains the current opinions of the author (s) and not those of any of our
partner companies. The author(s)
opinions are subject to change without notice. The author may or may not own
the securities referenced and, if such securities are owned, no representation
is being made that such securities will continue to be held.
No part of this
article may be reproduced in any form, or referred to in any other publication,
without express written permission of Zen of Wealth llc © 2015.
Chapt 1. 8
