Considerations before donating

If you’re considering a donation of art, here are four tips to keep in mind:

1. Get an appraisal. Given the subjective nature of art valuation and the potential for abuse, the IRS scrutinizes charitable donations and other transactions involving valuable artwork. Most art donations require a “qualified appraisal” by a “qualified appraiser.” IRS rules contain detailed requirements about the qualifications an appraiser must possess and the contents of an appraisal.

IRS auditors are required to refer all gifts of art valued at $20,000 or more to the IRS Art Advisory Panel. The panel’s findings are the IRS’s official position on the art’s value, so it’s critical to provide a solid appraisal to support your valuation.

2. Donate to a public charity. To maximize your charitable deduction, donate artwork to a public charity, such as a museum or university with public charity status. These donations generally entitle you to deduct the artwork’s full fair market value. If you donate art to a private foundation, your deduction will be limited to your cost. Keep in mind that the amount you may deduct in a given year is limited to a percentage of your adjusted gross income (30% for public charities, 50% for private charities) with the excess carried over to future years.

3. Beware the related-use rule. To qualify for a full fair-market-value deduction, the charity’s use of the artwork must be related to its tax-exempt purpose. So, for example, if you donate a painting to a museum for display or to a university for use in art classes, you’ll satisfy the related-use rule.

Even if the related-use rule is satisfied initially, you may lose some or all of your deductions if the artwork is worth more than $5,000 and the charity sells or otherwise disposes of it within three years after receiving it.

4. Transfer the copyright. If you own both the work of art and the copyright to the work, you must assign the copyright to the charity to qualify for a charitable deduction.

Fractional donations

At one time, it was possible to give art away gradually using a series of fractional gifts, and claim increasing deductions if the art continued to appreciate. Under current rules, however, the deduction for future fractional gifts is limited to the value of the initial fractional gift (or, if lower, the fair market value of the later fractional gift).

The rules surrounding donations of art can be complex. We can help you achieve your charitable giving goals while maximizing your tax benefits.

The benefit of making such gifts during life rather than at death is that you may be eligible for an income tax deduction. Qualifying for a charitable deduction is, in some respects, a matter of form over substance. The IRS could disallow a deduction, even if it’s otherwise legitimate, if you fail to follow the substantiation requirements to the letter.

If you’ve made charitable donations in 2018, it’s wise to review the substantiation rules as you file your 2018 tax return. Here’s a quick summary of the rules:

Cash gifts under $250: Use a canceled check, receipt from the charity or “other reliable written record” showing the charity’s name and the date and amount of the gift.

Cash gifts of $250 or more: Obtain a contemporaneous written acknowledgment from the charity stating the amount of the gift, whether you received any goods or services in exchange for it and, if so, a good-faith estimate of their value. An acknowledgment is “contemporaneous” if you receive it before the earlier of your tax return due date (including extensions) or the date you actually file your return. Also, there’s no need to combine separate gifts of less than $250 to the same charity (monthly contributions, for example) to determine if you’ve hit the $250 threshold for the contemporaneous written acknowledgment requirement.

Noncash gifts under $250: Get a receipt showing the charity’s name, the date and location of the donation, and a description of the property.

Noncash gifts of $250 or more: Obtain a contemporaneous written acknowledgment from the charity that contains the information required for cash gifts plus a description of the property. File Form 8283 if total noncash gifts exceed $500.

Noncash gifts of more than $500: In addition to the above, keep records showing the date you acquired the property, how you acquired it and your adjusted basis in it.

Noncash gifts of more than $5,000 ($10,000 for closely held stock): In addition to the above, obtain a qualified appraisal and include an appraisal summary, signed by the appraiser and the charity, with your return. (No appraisal is required for publicly traded securities.)

Noncash gifts of more than $500,000 ($20,000 for art): In addition to the above, include a copy of the signed appraisal (not the summary) with your return.

Failure to follow the substantiation rules can mean the loss of valuable tax deductions. We can help determine if you’ve properly substantiated your 2018 charitable donations.

There are many ways this can happen, including the exercise of stock options, participation in equity-based compensation programs, or receipt of stock in a merger or acquisition.

Sell the stock

To reduce your investment risk, the simplest option is to sell some or most of the stock and reinvest in a more diversified portfolio. This may not be an option, however, if you’re not willing to pay the resulting capital gains taxes, if there are legal restrictions on the amount you can sell and the timing of a sale, or if you simply wish to hold on to the stock.

To soften the tax hit, consider selling the stock gradually over time to spread out the capital gains. Or, if you’re charitably inclined, contribute the stock to a charitable remainder trust (CRT). The trust can sell the stock tax-free, reinvest the proceeds in more diversified investments, and provide you with a current tax deduction and a regular income stream. (Be aware that CRT payouts are taxable — usually a combination of ordinary income, capital gains and tax-free amounts.)

Keep the stock

To reduce your risk without selling the stock:

• Use a hedging technique. For example, purchase put options to sell your shares at a set price.
• Buy other securities to rebalance your portfolio. Consider borrowing the funds you need, using the concentrated stock as collateral.
• Invest in a stock protection fund. These funds allow investors who own concentrated stock positions in different industries to pool their risks, essentially insuring their holdings against catastrophic loss.

If you have questions about specific assets in your estate, contact us. We can help you preserve as much of your estate as possible so that you have more to pass on to your loved ones.

© 2018

What is it?

A charitable gift annuity is an arrangement in which you make a gift of cash or other property to a charity in exchange for a guaranteed income annuity for life. This is similar to buying an annuity in the commercial marketplace, except that you potentially can claim an immediate charitable deduction for the excess of the value of the property over the value of the annuity.

The payouts will generally be lower than those of a commercial annuity because a portion of your charitable gift annuity investment benefits charity. For you to claim a charitable deduction, the charity must receive at least 10% of the initial net value of the property transferred.

The annuity may be payable to you over your life, or over the joint lives of you and someone you’ve designated (a joint and survivor annuity). The rate of return is typically set at the time of the gift based in part on your age (and, if it’s a joint and survivor annuity, the age of the other person you’ve designated). A portion of each annuity payment is tax-free, because you’re entitled to recover your original investment over your life expectancy.

What’s my deduction amount?

Your charitable deduction will be less than the total value of your annuity purchase price because the deduction can be claimed for only the present value of the property that the charity will keep after your death. The present value is based on life expectancy and an IRS-prescribed interest rate at the time of purchase of the annuity.

Additional rules and limits apply to charitable gift annuities. Talk with us if you’re charitably inclined and would like to know if a charitable gift annuity is right for your estate plan.

© 2018

Setting up a DAF

As the name implies, your recommendations are integral to a DAF. First, you contribute to a fund typically managed by an independent sponsoring organization or an arm of a reputable financial institution. The minimum contribution generally is $5,000. In exchange for handling the management of the fund, the financial institution or organization usually charges an administrative fee based on a percentage of the deposit.

Next, you make recommendations as to how the DAF should distribute the assets to your favorite charities. Though technically you no longer have control of the money that has been contributed, the fund administrator will generally follow your advice. While you’re deciding which charities to support, your contribution is invested and grows tax-free. Then, your charitable choices are vetted by the organization to ensure that the recipients are qualified charitable organizations. Finally, the administrator cuts the checks and the funds are distributed to the charities.

DAF pros and cons

The advantages of using a DAF include an immediate tax deduction. Your contribution to the DAF is deductible in the tax year in which the initial contribution is made. You don’t have to wait until the fund makes distributions to the designated recipient. In addition, if you contribute appreciated property such as securities, there’s no capital gains tax on the appreciation in value. It remains untaxed forever. Moreover, contributions to a DAF aren’t subject to estate tax or the probate process, and the amounts contributed to the fund are invested and can grow without any tax erosion.

Conversely, despite some misconceptions, contributors to DAFs have effectively no control over how the money is spent once it’s disbursed to charities. Donors can’t benefit personally. For instance, you can’t direct that the money be used to buy tickets to a local fundraiser. In addition, detractors have complained about high administrative fees.

If you believe a DAF is the right charitable funding vehicle for you, be sure to shop around. Fund requirements — such as minimum contributions, minimum grant amounts and investment options — vary from fund to fund, as do the fees they charge. Contact us to help you find a fund that meets your needs.

© 2018

If reducing your taxable estate is an important estate planning goal, making lifetime charitable donations can help achieve that goal and benefit your favorite organizations. In addition, by making donations during your lifetime, rather than at death, you can claim income tax deductions. But some of your charitable deductions could be denied if you don’t follow IRS rules.

3 things to be aware of

First, the recipient charity must be a qualified charitable organization: It must have a tax-exempt status. The IRS has developed a tool on its website — the Exempt Organizations Select Check — that allows users to search for a specific tax-exempt organization, check its federal tax status and learn about tax forms the charity may file that are up for public review.

Second, the timing of pledging vs. payment of your charitable contributions can affect your deduction. Why? For most taxpayers, contributions are deductible only in the tax year they’re made. So if you pledged $5,000 in October of 2017, but paid only $1,500 of your pledge to the charity by December 31, 2017, you’re allowed to deduct only the $1,500 amount on your 2017 tax return.

Third, if you donate property and receive something in return, it’s important to know the fair market value of each item. For example, if you donate a flat screen TV to your child’s school and receive two tickets to a sporting event in return for your donation, you must first determine the value of your donation. Then you may deduct only the amount exceeding the fair market value of the two tickets.

Substantiate your donations

Be aware that substantiation rules also apply when giving cash or property to charity, and they vary based on the type and amount of the donation. For example, cash gifts of $250 or more require a “contemporaneous” written acknowledgment from the charity that includes information such as the gift’s amount and date and the estimated value of any goods or services received. For smaller gifts, a canceled check or credit card receipt may be sufficient.

If you’ve made substantial charitable donations, their deductibility depends on compliance with IRS rules, which go far beyond what we’ve discussed here. When in doubt, contact us to be sure you’ve dotted all the i’s and crossed all the t’s.

© 2018

Generally, it’s advantageous to donate appreciated property because, in addition to gaining a valuable tax deduction, you can avoid capital gains taxes. Because the top capital gains rate for art and other “collectibles” is 28%, donating art can be particularly effective.

5 tax-saving tips

If you’re considering a donation of art, here are five tips that can help you maximize your tax savings:

1. Obtain an appraisal. Most art donations require a “qualified appraisal” by a “qualified appraiser.” IRS rules contain detailed requirements about the qualifications an appraiser must possess and the contents of an appraisal. IRS auditors are required to refer all gifts of art valued at $20,000 or more to the IRS Art Advisory Panel. The panel’s findings are the IRS’s official position on the art’s value, so it’s critical to provide a solid appraisal to support your valuation.

2. Donate to a public charity. To maximize your charitable deduction, donate artwork to a public charity, such as a museum or university with public charity status. These donations generally entitle you to deduct the artwork’s full fair market value (provided the related-use rule is also satisfied). If you donate art to a private foundation, your deduction will be limited to your cost.

3. Understand the related-use rule. For you to qualify for a full fair-market-value deduction, the charity’s use of the donated artwork must be related to its tax-exempt purpose. So, for example, if you donate a painting to a museum for display or to a university for use in art history research, you’ll satisfy the related-use rule. But if you donate it to, say, an animal shelter to auction off at its fundraising event, you won’t satisfy the rule.

4. Transfer the copyright. If you own both the work of art and the copyright to the work, you must assign the copyright to the charity to qualify for a charitable deduction.

5. Consider a fractional donation. If you’re not ready to give up your artwork but are willing to part with it temporarily, consider donating a fractional interest. This allows you to generate tax savings while continuing to enjoy your art for part of the year. For example, if you donate a 25% interest in your art collection to a museum, the museum receives the right to display the collection for three months of each year. You deduct 25% of the collection’s fair market value immediately and continue to display the art in your home for nine months of each year.

Leave it to the professionals

The rules surrounding donations of art are complex. We can help you achieve your charitable goals while maximizing your tax benefits whether you wish to donate artwork or other valuables.

© 2017

When’s the delivery date?

To be deductible on your 2016 return, a charitable donation must be made by Dec. 31, 2016. According to the IRS, a donation generally is “made” at the time of its “unconditional delivery.” But what does this mean? Is it the date you, for example, write a check or make an online gift via your credit card? Or is it the date the charity actually receives the funds — or perhaps the date of the charity’s acknowledgment of your gift?

The delivery date depends in part on what you donate and how you donate it. Here are a few examples for common donations:

Check. The date you mail it.

Credit card. The date you make the charge.

Pay-by-phone account. The date the financial institution pays the amount.

Stock certificate. The date you mail the properly endorsed stock certificate to the charity.

Is the organization “qualified”?

To be deductible, a donation also must be made to a “qualified charity” — one that’s eligible to receive tax-deductible contributions.

The IRS’s online search tool, Exempt Organizations (EO) Select Check, can help you more easily find out whether an organization is eligible to receive tax-deductible charitable contributions. You can access EO Select Check at http://apps.irs.gov/app/eos. Information about organizations eligible to receive deductible contributions is updated monthly.

Many additional rules apply to the charitable donation deduction, so please contact us if you have questions about the deductibility of a gift you’ve made or are considering making. But act soon — you don’t have much time left to make donations that will reduce your 2016 tax bill.

© 2016

Satisfy your RMD

A charitable IRA rollover can be used to satisfy required minimum distributions (RMDs). You must begin to take annual RMDs from your traditional IRAs in the year in which you reach age 70½. If you don’t comply, you can owe a penalty equal to 50% of the amount you should have withdrawn but didn’t. (An RMD deferral is allowed for the initial year, but you’ll have to take two RMDs the next year.)

So if you don’t need the RMD for your living expenses, a charitable IRA rollover can be a great way to comply with the RMD requirement without triggering the tax liability that would occur if the RMD were paid out to you.

Additional benefits

You might be able to achieve a similar tax result from taking the RMD payout and then contributing that amount to charity. But it’s more complex because you must report the RMD as income and then take an itemized deduction for the donation. This has two more possible downsides:

• The reported RMD income might increase your income to the point that you’re pushed into a higher tax bracket, certain additional taxes are triggered and/or the benefits of certain tax breaks are reduced or eliminated. It could even cause Social Security payments to become taxable or increase income-based Medicare premiums and prescription drug charges.

• If your donation would equal a large portion of your income for the year, your deduction might be reduced due to the percentage-of-income limit. You generally can’t deduct cash donations that exceed 50% of your adjusted gross income for the year. (Lower limits apply to donations of long-term appreciated securities or made to private foundations.) You can carry forward the excess up to five years, but if you make large donations every year, that won’t help you.

A charitable IRA rollover avoids these potential negative tax consequences.

Have questions about charitable IRA rollovers or other giving strategies? Please contact us. We can help you create a giving plan that will meet your charitable goals and maximize your tax savings.

© 2016