More On Tax Planningfrom The Advisor's Professional Library
- ETF Taxation The use of ETFs may be attractive to certain investors. The tax advantages may make them even more attractive.
- Charitable Giving Charitable giving can reduce your clients’ tax liabilities. However, the general and verification rules for the deduction of charitable gifts must be understood in order to take full tax advantage of such gifts.
Whether considered a leading or lagging indicator of overall economic performance, it’s good news nonetheless. With the annual giving season under way, Schwab Charitable says it expects record charitable contribution levels, largely driven by efforts to meet philanthropic goals ahead of the possible expiration of the Bush‐era tax cuts at the end of this year, as well as the implementation of other tax policy reforms.
Specific to 2012, Schwab also offered up some strategies to maximize giving this holiday season, especially with so much tax and fiscal uncertainty just over the horizon.
As for the donation boom, as of October 31, Schwab says its donor-advised fund has seen a 74% increase in contributions year-over-year.
“This is the start of the busy giving season, which typically runs from Thanksgiving through the end of the year,” Kim Laughton, president of Schwab Charitable, said in an interview with AdvisorOne on Tuesday. “This year is a bit different. Over the summer, there was a question of whether the exclusion levels on the estate tax would be reduced from $5 million to $1 million, so giving activity started to ramp up much earlier.”
The reason, Laughton (left) added, is that a conversation about wills and estate taxes is a natural precursor to a discussion about charitable giving.
“They figure, ‘If I’m thinking about my legacy of charitable giving after I die, why wouldn’t I do it when I’m still alive, as well?’” she said.
Additionally, she said she's “pretty sure there will be an increase in capital gains,” and strong stock market performance recently means many investors will be looking to offset the taxes on those gains through charitable giving deductions.
The Schwab vehicle, a donor-advised fund, allows investors to contribute cash or appreciated assets to a charitable account to realize the greatest possible tax benefit. This means donors can more “strategically” support the charities of their choice.
As for those strategies, Laughton offered up five for smart giving this holiday season; some are tried and true, some are new.
Reduce estate size before taxes rise and exclusion amount drops: With estate tax exclusions potentially decreasing from over $5 million to $1 million and estate tax rates set to potentially rise, individuals can make donations to charitable accounts that will enable them to immediately reduce their estate size and tax exposure and give more to important causes during their lifetimes.
Donate highly appreciated assets to charity to offset taxes from capital gains: Contributions can be made now to realize the maximum tax benefit, but the donor can decide later what causes he/she wants to support.
Donate to charitable accounts in 2012 to lock in the maximum deduction: Some proposals to cap itemized deductions starting in 2013 could reduce the income tax benefits of future charitable gifts.
Donate to charitable accounts to reduce the income tax generated by a Roth IRA conversion: For individuals who are converting a traditional individual retirement account (IRA) to a Roth IRA, charitable giving can help to offset the taxes resulting from such a conversion.
Donate to charitable accounts to enable tax‐free growth to support future giving: In general, putting as much money as the budget allows into non‐taxable accounts enables potentially greater tax‐free growth which, in the case of charitable accounts, can support an ongoing strategic giving strategy.
“When advisors are helpful in providing clients with simple and tax‐effective ways to support the causes that are important to them, it opens up much more personal conversations and builds tremendous loyalty,” Laughton concluded. “The holiday giving season is a natural opportunity to ask questions about giving intentions and strategies and highlight their importance in financial and tax planning.”
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