Ask the Expert: Taxes and Year-End Giving

People are often concerned about changes that might occur in our tax code this year or next. What’s most important is planning carefully and anticipating changes that might directly impact you. With that said, I also caution against acting too soon. Any time there is a change of administration in Washington, D.C., individuals try to predict changes and make decisions that could be adversarial to their situation. When we're in an environment where things feel like they're changing, people lose track of the larger context and how it really impacts them. The benefit of working with a financial professional is that they can focus on the client’s long-term goals without making emotional, short-term decisions.

The most significant change is the treatment of non-spouse beneficiaries for qualified accounts such as traditional IRAs. In the past, younger IRA beneficiaries, such as a grandchild, could usually take distributions over their lifetime, if desired. We can no longer “stretch” the IRA distributions like this. Now, non-spousal beneficiaries must take the full distribution by the end of 10 years. If this law negatively affects you, seek a professional advisor and carefully plan to achieve the best results for your situation.

Yes, generally, a spouse, child or other individual designated as a beneficiary of a traditional IRA must pay federal income tax on any distribution received from the IRA after your death. And as mentioned above, the inability for non-spousal beneficiaries to “stretch” these distributions places a heavy tax burden on them. By contrast, if you name a tax-exempt charitable organization as your beneficiary, the charity will not have to pay income tax on distributions from the IRA after your death—a significant tax advantage.

Some individuals then decide to replace IRA assets for their heirs by maintaining existing life insurance policies or acquiring more.

Absolutely! A qualified charitable distribution (QCD) is a wonderful option to achieve this for those 70.5 or older. To make a QCD, instruct your IRA custodian to make a distribution directly from your traditional IRA to a qualified charity. The distribution must be one that would otherwise be taxable to you. Currently, you can exclude up to $100,000 of QCDs from your gross income each year. When filing a joint return, your partner (if 70.5 or older) can exclude an additional $100,000 of QCDs.

Note: You cannot double-dip by also deducting QCDs as a charitable contribution on your federal income tax return.

The most common asset is highly appreciated or rapidly appreciating property, such as stocks, exchange-traded funds, mutual funds or real estate. Typically, these assets can be transferred in-kind to the charity, avoiding current or future capital gains.

With all planning, it is important to identify what you want to accomplish before discussing techniques. Start by articulating your goals to your tax or estate professional, so they can help you understand the current benefits and future opportunities of charitable giving scenarios. Most philanthropic plans benefit both you and your chosen charitable organization(s).

Many donors and charities tend to focus on year-end giving. However, when considering giving a highly appreciated asset, one may want to give that asset at a time when they feel its value is highest, regardless of the time of year.

Develop a family giving plan. I have annual meetings with some of my clients about not only their main donations but also how they can get their adult children involved in philanthropy toward their passions. Discussing your charitable gifts with children or grandchildren helps pass along your charitable intentions and instill your values in future generations.