By Phillip J. Strosahl, CPA
As the holidays approach, you may be considering gifts to a charity or family members. It’s also a time when people start to think about their tax liability for the year, and how smart gifting might help reduce their tax bill. The following is an overview of the tax benefits of gifting that will guide you in making your year-end decisions.
Tax Benefits: First, you receive an income tax deduction (up to 50 percent of your adjusted gross income) for the amount of cash or the fair market value of the assets donated to charity. Second, you don’t have to worry about gift tax because federal gift tax doesn’t apply to charitable gifts. Third, charitable gifts reduce your taxable estate, thus reducing your potential estate tax.
Assets to Donate:
The 2006 Pension Act allows a person age seventy-and-one-half or older to donate up to $100,000 from their IRA to charity for years 2006 and 2007, without it being reported or taxed as income. The donation can be part of the required minimum distribution; however, such a gift is not eligible for a charitable tax deduction.
Gifting can be a powerful estate planning tool, allowing you to transfer your resources to others during your lifetime while greatly reducing your tax burden.
Tax Benefits: You may enjoy significant income tax and estate tax savings with a properly structured gifting program. Such gifts can:
Caution: Your potential federal income tax savings from transferring income-producing property to your children may be reduced by the “kiddie tax” (unearned income of a child under age 18 may be taxed at the parent’s tax rate).
Federal income tax rates range from 10 percent to 35 percent; therefore, the gifting of certain assets to individuals in the lower tax brackets can save up to 25 percent in income tax. Likewise, the higher the tax bracket, the greater the tax savings for any charitable deductions.
The federal estate tax rate in 2006 for taxable amounts over $2 million is 46 percent. There is no federal estate tax for estates with taxable assets up to $2 million for years 2006 thru 2008.
The potential to reduce tax liability is a powerful motivating factor for many, and shows the importance of taking the time to look carefully at your income and estate planning. While “Charity is its own reward,” donors should take full advantage of tax strategies that allow them to maximize the impact of their gift and enjoy the results of their generosity. Because everyone’s situation is different, we recommend you seek professional financial advice to help with your personal financial planning.
Phillip J. Strosahl is a certified public accountant with Strosahl & Co., CPAs, SC, Business and Tax Advisors.
Having a will that’s outdated may be as bad as no will at all. The purpose of a will is to make sure that your wishes and intentions are carried out after your death. But more than half of all Americans die without a will, leaving their assets to be distributed in ways they never intended. Probate, legal fees and taxes can virtually wipe out even a sizeable estate. A well-structured will can assure that your loved ones are provided for and your values endure well into the future.
As important as it is to have a will, it’s equally vital to make sure it stays current. As you and your family grow older, as income sources, assets and laws change, it is important to make sure your will reflects your current wishes and circumstances. It may be as easy as adding a codicil (or amendment) to your will providing for new beneficiaries, or adding a charitable bequest that will reduce your heirs’ estate taxes while creating a permanent legacy. If your will is more than three or four years old, make an appointment with your attorney or financial advisor to make sure it serves its original purpose – carrying out “your will.”
Community Memorial Foundation promotes and enhances the health of all individuals in our community through the development and management of resources in collaboration with the mission of Community Memorial Hospital.
The articles in LifeTimes are for information only. Talk to your tax, financial or legal advisor to make decisions best for your own situation.
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