Year-End Planning

Tax-smart strategies for giving

Year-end planning is a ritual for people who coordinate their tax planning with their charitable giving. Anticipating the end of the year takes on additional significance as we adjust to ever-changing tax laws and shifting financial markets. Completing a gift by December 31 can help you reduce your tax bill for this year while making a difference for future generations. Let’s look at some ideas that can be important to year-end planning.

Cash gifts and tax savings

Cash is the simplest and most popular type of charitable gift. When you itemize deductions, a cash gift is deductible up to 60 percent of adjusted gross income. Your actual tax savings depends on the amount of your gift as well as your marginal income tax bracket.

More savings with gifts of appreciated stock

You can also make gifts to IU with appreciated stock or mutual fund shares (held for more than one year) and enjoy even greater tax savings. When you itemize, you receive an income tax charitable deduction for the full fair market value of the shares and you owe no capital gains tax on the appreciation, even when the gain has never been taxed. By leveraging an untaxed gain to generate tax deductions, you substantially reduce the tax on your reportable income.

Example: Jensen owns long-term appreciated stock purchased for $1,000 but now valued at $5,000. If he sells the stock, he will incur a capital gains tax of $600 on the $4,000 gain—$4,000 x 15 percent capital gains tax rate.
Instead, Jensen chooses to use the stock to make a gift to IU. Because he itemizes, he enjoys a deduction for the full fair market value of the stock ($5,000). In his 35 percent tax bracket, he saves $1,750 and bypasses the $600 capital gains tax liability. Therefore, the net cost of his gift is only $2,650 ($5,000 - $1,750 - $600) compared to $3,350 for a cash gift of $5,000.
Examples are for illustrative purposes only.

Because the tax law rewards gifts of long-term appreciated property, you actually can have a greater impact with your gifts at a lower cost.

Note: Your deduction is limited to 30 percent of your adjusted gross income (AGI). When your deduction exceeds the 30 percent-of-AGI limitation, you may carry over your excess deduction for up to five years.

Gifts that increase income

Life income gifts are gift arrangements that pay you an income, provide immediate tax savings, and ultimately leave a gift that will have an important impact on our programs.

One of the most popular life income gifts is a charitable gift annuity. In exchange for your gift, we promise to make fixed payments for your lifetime and you qualify for an immediate income tax charitable deduction.

Charitable gift annuities are easy to set up. You can get started simply by calling our office. In fact, they are so popular that many of our donors have more than one. A gift annuity can provide you with an excellent opportunity to make a deductible year-end gift and receive a welcome boost to your retirement income.

Long-term opportunities

Let’s look at some additional long-term legacy planning ideas that merit special attention.

A gift in your will

As you plan for loved ones, you may want to include a gift in your will for a charity that can make a difference. You can leave:

  • A specific dollar amount or specific property
  • A percentage of your estate
  • What’s left of your estate after other bequests, taxes, and settlement costs are satisfied

Beneficiary designations

You can name IU as the beneficiary of a living trust, life insurance policy, or retirement plan account. Retirement plan assets in particular can pose tax problems for heirs, while other savings and investments can be transferred to heirs with no additional tax—and sometimes even with a step up in basis. A planned gift to us, however, can reduce or eliminate these taxes on retirement assets and, at the same time, provide more for family members by allowing other assets to transfer free of tax.

Other life income plans

In addition to a charitable gift annuity, you may want to consider a charitable remainder trust. Both of these unique planning tools give you the opportunity to realize a wide range of long-term objectives, such as supplementing your retirement income or providing for a dependent relative.

Tax-wise tips for year-end gifts

Gifts by check or credit

When you write a check to IU and mail it by December 31, you can deduct it this year, even if we don’t cash it until next year. When you charge your gift to a credit card, you can deduct the gift in the year the charge is posted to your account.

Pledges and IOUs

If you make a pledge to charity or give an IOU, you can only deduct this as a charitable contribution in the year you actually satisfy the pledge or pay off the note.

Gifts of stock

You can make a gift of stock by electronic transfer or by personally delivering or mailing the actual stock certificate. Ownership of the stock certificate is changed to the charity on the books of the corporation issuing the stock.

Gifts of appreciated property

We already discussed the benefits of gifts of appreciated stock—you can generally deduct the full value of the contributed property (subject to the 30 percent-of-AGI limitation) even though the gain has never been taxed. Keep in mind that this applies to all appreciated property, including stocks, bonds, mutual funds, real estate and, in some cases, collectibles.

Option for loss property

“Loss property” is property that would generate a tax-deductible loss if you sold it. If you gave this property to charity, you would lose your deduction for the property’s loss in value. Instead, consider selling the property, taking the loss as a deduction, and using the proceeds to make your deductible charitable gift.

Sponsored gifts

If your employer offers a matching gift program, multiply the impact of your gift simply by requesting the match from your employer.

Note: Deductions are available if you itemize your tax return.

Fast facts about popular charitable giving options

This is a simple gift to implement. You just transfer cash, write a check, or use your credit card. The gift is fully deductible up to 60 percent of AGI with a 5-year carryover of any excess deduction.

Easy to carry out and the most popular non-cash gift. Just transfer possession and any document of title to charity. The gift is deductible up to 30 percent of AGI, with a 5-year carryover provision. There is no capital gains tax owed on the appreciation.

A CRAT will pay you or another beneficiary a percentage of the initial value of the assets donated to the trust for life or for a period of up to 20 years. There is no capital gains tax when you transfer appreciated property to the CRAT. You can deduct the present value of the charity’s remainder interest, subject to the 60 percent (cash gift) or 30 percent (long-term appreciated property) of AGI limitation.

A CRUT will pay you or another beneficiary a percentage of the value of the trust assets as revalued each year—if the value of trust assets goes up or down, so does the payout amount. There is no capital gains tax when you transfer appreciated property to the CRUT or when the trustee sells the property. You can deduct the present value of the charity’s remainder interest, subject to the 60 percent (cash gift) or 30 percent (long-term appreciated property) of AGI limitation. A CRUT is more flexible than a CRAT and can act as a hedge against inflation.

Transfer cash or appreciated property to charity and receive back fixed payments for life. The payment amount is based on the age(s) of the beneficiary(ies) and is partly tax-free until the beneficiary reaches life expectancy. If you give appreciated property, you can recognize some of the capital gain pro-rata over your life expectancy (if you are the primary beneficiary). You can deduct the value of the property given, minus the present value of the income stream from the annuity, subject to the 60 percent (cash gift) or 30 percent (long-term appreciated property) of AGI limitation.

You can use life insurance to make tax-wise charitable gifts. An irrevocable assignment of a paid-up life insurance policy can generate an income tax deduction that reflects your cost basis in the policy or its replacement value (whichever is lower). Alternatively, you can give other assets to charity, then use a life insurance policy to eventually replace the wealth in your estate that you contributed to charity during life.

If you are age 70½ or over and own an IRA, you can make a gift using a direct transfer of funds from your IRA to a qualified charity. Transferred amounts count toward your required minimum distribution (RMD) if one is due, but no tax is due on the distribution (up to the $105,000 annual aggregate limit in 2024). At any time during the year, you can simply notify the IRA custodian to make a direct transfer from your IRA to IU. This is not only an easy way to give, but it can play a strategic role in your annual planning and have an immediate impact on our mission.

Beginning in 2023, another QCD option became available. You can make a one-time QCD up to $53,000 (in 2024) to fund a new charitable remainder trust or charitable gift annuity. You owe no tax on the distribution and it counts toward your RMD if one is due (generally, age 73 and older). Spouses can each contribute up to $53,000 (in 2024) to fund a single charitable remainder trust or a joint-life charitable gift annuity.

The next step

We can help you find rewarding year-end planning strategies with unique combinations of tax savings and personal satisfaction. You can implement many of these strategies with the help of our experienced professional staff who are committed to helping you explore the best planning and transfer goals for your personal situation. Please take a moment to contact us by phone or email, and as always, we value your support and look forward to working with you in the future.