Wealth Mgmnt

Making the most of Year-End Charitable Tax Donations for 2021

The end of another calendar year brings with it the opportunity to take a look at your charitable contributions once again, and see if they align themselves with current and new tax rules for 2021. Remember that December 31st is the last day for individuals to utilize any given charitable deduction for the year. Making charitable contributions can decrease your tax bill, and since high‐income earners generally pay taxes at higher rates, they may enjoy a particularly large tax benefit from charitable contributions. In addition, there are several important pandemic related deductions for the current year that will go away next year. One allows millions of taxpayers who wouldn’t normally get a tax break for donations to deduct up to $300 per single filer and $600 per married couple filing jointly. The other allowance for wealth management purposes is a full deduction of any gifts that make up 100% of your income. If you are like most and have significant gains in the stock market this year, it will be particularly important to offset those gains with these significant deductions.

High net worth and ultra-high net worth individuals should consider making these deductions now. Let’s take a look at the federal gift and estate tax. Currently, the amount exempt from federal gift and estate tax is $11.7 million per person, which means that you may give this amount during your lifetime, free of gift tax, with any unused amount applied against federal estate taxes at your death. This, however, will be phased out by year end 2025, with many tax experts warning that the current administration may phase this deduction out much sooner.

Take advantage of trusts, as they have come a long way since the day of your grandfather. Today’s modern trusts are built with much more flexibility and can be structured to continue to meet the needs of your family with transparency, and over multiple generations. Known as grantor trusts, these vehicles utilize your exemptions and offer potential growth outside of your individual estate. Probably the biggest benefit of the grantor trust is that it effectively allows assets to grow income tax free. Such trusts are usually professionally managed and provide you with tax mitigation and creditor protection services as well.

In addition to the cash deductions mentioned for those that take the standardized deduction, there is a benefit in donating stock that has appreciated in value. This allows you to deduct the fair market value of the stock as a charitable donation, thus avoiding capital gains taxes, as long as you’ve held the stock for at least a year. With uncertainty as to how charitable contributions will be taxed under next year’s rules, it is generally advised that you act on them this year. According to Lawrence Katzenstein, an attorney specializing in charitable planning with Thompson Coburn in St. Louis, “If you wait until Dec. 31st that may be too late. At least check with your broker to determine how quickly the firm can make a transfer.”

Consider what is known as a bunching strategy this year to consolidate your giving in a single year to maximize tax benefits. What you would typically do is give more in the current year, and perhaps skip the next year. This strategy can work well when your total itemized deductions for a single year fall below the standard deduction. The catch is that this strategy requires having the financial capacity to pack more than a year’s worth of your contributions into a single year. Another wealth management concept would be to establish a donor advised fund, which is actually sponsored by a public charity. It allows donors to make a charitable contribution to the public charity, receive an immediate tax deduction, and then recommend grants from the fund to a variety of other charities over time. In addition, donated funds in this type of entity can be invested prior to charitable distribution and earn returns without being taxed.

While slightly more esoteric, one may consider donating complex assets. These are things like stock held in a private company, cryptocurrency and even long term real estate that has appreciated. While these types of assets are typically more complex, they do offer you another way of making charitable donations. Lastly, if you are over 70 ½ you may want to consider a Qualified Charitable Distribution from your IRA. This action can satisfy charitable goals and allows funds to be withdrawn from an IRA without any tax consequences. All of the strategies mentioned, properly employed, represent a tax‐advantaged way for you to give more to your favorite charities.

Wealth Mgmnt