www.union.plannedgifts.org
2006 Planning and Year-End Giving
Posted December, 2006
At its heart, year-end tax planning is all about positioning yourself for optimum tax results—both this year and in the future—in light of your overall personal, family, and charitable objectives.
It is also important to remember that smart tax planning is not a year-by-year proposition. If you adopt a multiyear approach to your planning, you can often achieve a host of positive results. These benefits may come from postponing income, increasing deductions, or taking advantage of some special tax-saving opportunities you might otherwise have overlooked.
THE BASICS
Minimizing Adjusted Gross Income
One of the most crucial lines on your federal income-tax return is the one that reflects your adjusted gross income (AGI). It is, in effect, the primary benchmark against which exemptions and deductions are taken in arriving at taxable income. It also controls the degree to which you are eligible to utilize other tax-saving measures—such as contributions to individual retirement accounts—and determines whether some other tax breaks are reduced or phased out completely.
If you expect to be in a higher tax bracket next year, you will probably want to realize as much income this year while you are in a lower bracket. But if you are like most taxpayers, holding down adjusted gross income can be beneficial in many ways. Here are some ways to do this:
Reducing Taxable Income
Once you arrive at your AGI, the next challenge is to maximize deductions and exemptions that help reduce the amount subject to tax.
Mobilize Your Deductions
To reduce your taxable income for 2006, you will want to take advantage of all deductions available to you.
For instance, you are entitled to deduct state and local income tax paid during the year, any real estate taxes you pay during the year and, in most cases, interest you pay on a mortgage for a first or second home. To increase the amount you can deduct this year, you might decide to prepay real estate taxes or interest on a home mortgage.
If you are eligible to make tax-advantaged contributions to any kind of retirement plan, such as an IRA, a self-employed Keogh plan, or an employer-sponsored plan, be sure to take full advantage of this opportunity to secure your retirement and save current tax dollars.
TAKE ADVANTAGE OF NEW TAX LEGISLATION
The new Pension Protection Act of 2006 creates an exciting gift-planning opportunity from your IRA without having the amount of the gift included in your gross income. To qualify:
This opportunity is available for only 2006 and 2007, and no charitable income-tax deduction is allowed.
Let Your Charitable Gifts Do Double Duty. With a little creative planning, you can squeeze even more benefits out of your charitable gifts. You can do this by using long-term appreciated assets to fund your gifts.
Reason: Such gifts are generally deductible at their full fair-market value, regardless of how much you paid for them. Better still, you do not have to recognize or pay tax on any of the built-in paper gain. If you sell long-term appreciated assets, you pay tax of up to 15% on the profit.
Example: Jerry owns $20,000 worth of stock he purchased several years ago for $5,000. If Jerry donates the stock to us, he will be allowed a $20,000 deduction and will save $6,600 on his income taxes.
In addition, Jerry avoids having to pay tax on a $15,000 profit he would have realized had he sold the stock. This means Jerry will save an additional $2,250 ($15,000 x 15% long-term capital-gain tax rate) by giving the stock directly, as opposed to selling it and giving cash. This reduces his final out-of-pocket cost to just $11,150 ($20,000 less $6,600 income-tax savings and less $2,250 capital-gain tax savings).
Give Tomorrow, Deduct Today. Many of our friends intend to make generous provisions for us through their estates. If you have such goals, you may be intrigued by a plan that allows you to take a significant charitable deduction right now and secure a future gift to us without any change in your current lifestyle.
It is possible to give us the right to receive a personal residence or a farm at your death and take an income-tax deduction now.
Example: Bill and Rachel J, both aged 75, know that they would like us to have their home when they are both gone. They would like the satisfaction of knowing that a gift is in place during their lifetimes, and they would also enjoy the benefits of a major tax deduction.
After conferring with their advisors and a member of our staff, Bill and Rachel transfer a remainder interest in their home to us and retain a life estate for themselves. Their home is currently worth $500,000. Based on their ages, Bill and Rachel can take a $192,322 federal tax deduction this year.
Bill and Rachel's current lifestyle will not change at all. They can continue to live in and enjoy their home as long as either of them lives. Plus, they will actually have an additional $67,313 of spendable cash as a result of the tax savings from their deduction in their 35% federal income-tax bracket ($192,322 x 35%).
If you would like additional information about any of the concepts discussed in this article, please write or call us. It would be our pleasure to meet with you and your advisors to discuss how creative charitable planning can help you meet your overall objectives.