Giving Strategies

Make Year-end Gifts Directly Paying Tuition Cost (or Medical Bills)

For those who would like to make year-end gifts that exceed the $12,000 annual gift tax exclusion, one option is to cover some or all of the intended gift recipient's tuition cost (not room and board or other costs) by making direct payments directly to the educational institution. Such direct tuition payments won't reduce the giver's $1 million federal gift tax exemption nor will they reduce the giver's $2 million federal estate tax exemption. Note that this break is available for K-12 private school tuition costs, as well as college tuition.

In addition to directly paying for tuition costs, up to another $12,000 can be given away in 2008 under the annual federal gift tax exclusion privilege ($24,000 for joint gifts by a married couple). Gifts covered by the exclusion privilege won't reduce the giver's federal gift tax or estate tax exemptions. As a bonus, the gifts will reduce the giver's taxable estate.

Note: The same favorable tax outcome also applies to direct payments to cover a person's medical costs. As long as the payments go directly to medical providers, there are no adverse gift or estate tax consequences for the giver.

Make Year-end Gifts to Section 529 College Plan Accounts

In general, contributions to fund another person's Section 529 plan account qualify as completed gifts to that person for federal gift and estate tax purposes. As such, the contributions are eligible for the annual federal gift tax exclusion privilege ($12,000 for 2008 gifts). However, a beneficial special rule for Section 529 plans allows the giver to contribute a larger amount and then spread it out over five year's for federal gift tax purposes. This effectively allows the giver to use five year's worth of annual gift tax exclusions to shelter the contribution.

For example, the special rule allows up to $60,000 (5 X $12,000) to be contributed at the end of 2008 to a child's or grandchild's Section 529 plan account without reducing the giver's $1 million federal gift tax exemption or the giver's $2 million federal estate tax exemption (this assumes that no gifts to benefit that child or grandchild were made earlier in 2008 and that none will be made in 2009-2012). A married couple can jointly contribute up to $120,000 (5 X $12,000 X 2) to a child's or grandchild's Section 529 plan account without any adverse gift tax consequences (again, this assumes no gifts to benefit that child or grandchild were made earlier in 2008 and that none will be made in 2009-2012).

Section 529 plan contributions generally reduce the giver's taxable estate. However, if a contribution is spread over five years under the special rule just described, a portion of the enhanced gift tax exclusion amount must be added back to the giver's taxable estate if he or she dies before the end of the four-year period beginning with the year after the year of the contribution- i.e., before 1/1/12 for a 2008 contribution.

Make Year-end Gifts to Coverdell Education Savings Accounts

Contributions to fund another person's Coverdell Education Savings Account (CESA) also qualify as completed gifts to that person for federal gift and estate tax purposes. As such, the contributions are eligible for the annual federal gift tax exclusion privilege ($12,000 for 2008 gifts). However, there's a $2000 annual limit on contributions to one or more CESAs set for the same beneficiary (typically a child or grandchild).

For example, say you have five grandchildren. Before the end of 2008, you may contribute up to $2000 to a CESA set up for each grandchild (total contributions of $10,000), assuming no contributions to their accounts were made earlier this year. (See IRC Sec. 530). As a bonus, CESA contributions will reduce the giver's taxable estate.

Make Year-end IRA Contributions for Children or Grandchildren

If your child or grandchild has 2008 earned income, you may make a cash gift that's used to fund a 2008 contribution to a traditional or Roth IRA set up for the child or grandchild. The gift would be eligible for the $12,000 federal gift tax exclusion privilege. However, contributions to a child's or grandchild's IRA are limited to the lesser of: (1) $5,000 or (2) the child's or grandchild's 2008 earned income. Generally, a Roth IRA contribution will make more sense for a young child or grandchild because he or she may not gain any current tax benefit from a traditional IRA contribution.

For example, say your client funds a $4,000 Roth IRA contribution for a 15-year-old grandchild. Assuming an 8% annual rate of return, the Roth IRA would amount to about $188,000 of federal-income-tax-free money by the time the grandchild is 65. Wow! As a bonus, the contribution will reduce the client's taxable estate.

Make Year-end Charitable Contributions from IRAs

A beneficial change included in the Pension Protection Act of 2006 allows individuals who have reached age 70 ½ to make cash donations to tax-exempt charities directly out of their IRAs. These so-called qualified charitable distributions (QCDs) are federal-income-tax-free for donors. While a QCD won't result in any Schedule A itemized writeoff, the tax-free treatment equates to an immediate 100% federal income tax deduction without any static from unfavorable rules that can reduce or delay itemized deductions for "normal" charitable donations.

Currently there is a $100,000 limit on QCDs for the donor's tax year that began in 2007.

The IRS has confirmed that the $100,000 limit is based on a per-IRA-owner concept. Therefore, when a husband and wife both have IRAs, each spouse is entitled to a separate $100,000 limit (for a combined total of $200,000) even when a joint return is filed. The IRS has also confirmed that an IRA beneficiary (a person who inherits an IRA from the original account owner) can arrange for a QCD if the beneficiary is over age 70 ½.

As just explained, a federal-income-tax-free QCD is not included in the donor's gross income or adjusted gross income, which amounts to a 100% deduction. Great! But there's more.

Because a QCD is not included in the donor's AGI, he or she is less likely to be adversely affected by all those nasty AGI-based tax rip offs - such as the rule that can cause more social security benefits to be taxed and the rules that can cut back itemized deductions (including those for charitable donations), personal exemptions, and passive rental real estate losses.
Making a QCD also allows the donor to completely avoid the percent-of-AGI limitations that can postpone itemized deductions for garden-variety charitable donations.
Perhaps most importantly, a QCD counts as a distribution for purposes of the required minimum distribution (RMD) rules. Therefore, an individual can arrange to donate all or part of the RMD amount (up to the $100,000 QCD limit) that he or she would otherwise be forced to receive and pay taxes on in 2008.
Last but not necessarily least, making a QCD will reduce the donor's taxable estate.

Observation: The QCD strategy can be beneficial for well-off seniors such as those: (1) who don't itemize (under the "normal" rules only itemizers get any income tax benefit from charitable donations), (2) whose itemized charitable donations would be reduced by the IRC Section 68 phase-out provision and/or postponed by the percentage-of-AGI limitations, (3) who want to avoid being taxed on RMD's from their traditional IRAs, and (4) who are interested in estate-tax-reduction moves.

Donate LTCG Securities, but Sell Losers and Contribute the Cash

Last but not least, clients should be advised that a charitable contribution of a LTCG asset (such as appreciated stock or mutual fund shares) generally results in a charitable write-off equal to the full FMV of the asset and avoidance of any federal capital gains tax on the appreciation. So, making year-end contributions of long-term capital gain assets is generally a great idea.

In contrast, clients should not contribute loser securities (those with current FMV that is less that tax basis). Instead, clients should sell losers, claim the resulting capital loss on Schedule D, and contribute the cash from the sale proceeds.


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	Giving Strategies Make Year-end Gifts Directly Paying Tuition Cost (or Medical Bills) For those who would like to make year-end gifts that exceed the $12,000 annual gift tax exclusion, one option is to cover some or all of the intended gift recipient's tuition cost (not room and board or other costs) by making direct payments directly to the educational institution. Such direct tuition payments won't reduce the giver's $1 million federal gift tax exemption nor will they reduce the giver's $2 million federal estate tax exemption. Note that this break is available for K-12 private school tuition costs, as well as college tuition. In addition to directly paying for tuition costs, up to another $12,000 can be given away in 2008 under the annual federal gift tax exclusion privilege ($24,000 for joint gifts by a married couple). Gifts covered by the exclusion privilege won't reduce the giver's federal gift tax or estate tax exemptions. As a bonus, the gifts will reduce the giver's taxable estate. Note: The same favorable tax outcome also applies to direct payments to cover a person's medical costs. As long as the payments go directly to medical providers, there are no adverse gift or estate tax consequences for the giver. Make Year-end Gifts to Section 529 College Plan Accounts In general, contributions to fund another person's Section 529 plan account qualify as completed gifts to that person for federal gift and estate tax purposes. As such, the contributions are eligible for the annual federal gift tax exclusion privilege ($12,000 for 2008 gifts). However, a beneficial special rule for Section 529 plans allows the giver to contribute a larger amount and then spread it out over five year's for federal gift tax purposes. This effectively allows the giver to use five year's worth of annual gift tax exclusions to shelter the contribution. For example, the special rule allows up to $60,000 (5 X $12,000) to be contributed at the end of 2008 to a child's or grandchild's Section 529 plan account without reducing the giver's $1 million federal gift tax exemption or the giver's $2 million federal estate tax exemption (this assumes that no gifts to benefit that child or grandchild were made earlier in 2008 and that none will be made in 2009-2012). A married couple can jointly contribute up to $120,000 (5 X $12,000 X 2) to a child's or grandchild's Section 529 plan account without any adverse gift tax consequences (again, this assumes no gifts to benefit that child or grandchild were made earlier in 2008 and that none will be made in 2009-2012). Section 529 plan contributions generally reduce the giver's taxable estate. However, if a contribution is spread over five years under the special rule just described, a portion of the enhanced gift tax exclusion amount must be added back to the giver's taxable estate if he or she dies before the end of the four-year period beginning with the year after the year of the contribution- i.e., before 1/1/12 for a 2008 contribution. Make Year-end Gifts to Coverdell Education Savings Accounts Contributions to fund another person's Coverdell Education Savings Account (CESA) also qualify as completed gifts to that person for federal gift and estate tax purposes. As such, the contributions are eligible for the annual federal gift tax exclusion privilege ($12,000 for 2008 gifts). However, there's a $2000 annual limit on contributions to one or more CESAs set for the same beneficiary (typically a child or grandchild). For example, say you have five grandchildren. Before the end of 2008, you may contribute up to $2000 to a CESA set up for each grandchild (total contributions of $10,000), assuming no contributions to their accounts were made earlier this year. (See IRC Sec. 530). As a bonus, CESA contributions will reduce the giver's taxable estate. Make Year-end IRA Contributions for Children or Grandchildren If your child or grandchild has 2008 earned income, you may make a cash gift that's used to fund a 2008 contribution to a traditional or Roth IRA set up for the child or grandchild. The gift would be eligible for the $12,000 federal gift tax exclusion privilege. However, contributions to a child's or grandchild's IRA are limited to the lesser of: (1) $5,000 or (2) the child's or grandchild's 2008 earned income. Generally, a Roth IRA contribution will make more sense for a young child or grandchild because he or she may not gain any current tax benefit from a traditional IRA contribution. For example, say your client funds a $4,000 Roth IRA contribution for a 15-year-old grandchild. Assuming an 8% annual rate of return, the Roth IRA would amount to about $188,000 of federal-income-tax-free money by the time the grandchild is 65. Wow! As a bonus, the contribution will reduce the client's taxable estate. Make Year-end Charitable Contributions from IRAs A beneficial change included in the Pension Protection Act of 2006 allows individuals who have reached age 70 ½ to make cash donations to tax-exempt charities directly out of their IRAs. These so-called qualified charitable distributions (QCDs) are federal-income-tax-free for donors. While a QCD won't result in any Schedule A itemized writeoff, the tax-free treatment equates to an immediate 100% federal income tax deduction without any static from unfavorable rules that can reduce or delay itemized deductions for "normal" charitable donations. Currently there is a $100,000 limit on QCDs for the donor's tax year that began in 2007. The IRS has confirmed that the $100,000 limit is based on a per-IRA-owner concept. Therefore, when a husband and wife both have IRAs, each spouse is entitled to a separate $100,000 limit (for a combined total of $200,000) even when a joint return is filed. The IRS has also confirmed that an IRA beneficiary (a person who inherits an IRA from the original account owner) can arrange for a QCD if the beneficiary is over age 70 ½. As just explained, a federal-income-tax-free QCD is not included in the donor's gross income or adjusted gross income, which amounts to a 100% deduction. Great! But there's more. Because a QCD is not included in the donor's AGI, he or she is less likely to be adversely affected by all those nasty AGI-based tax rip offs - such as the rule that can cause more social security benefits to be taxed and the rules that can cut back itemized deductions (including those for charitable donations), personal exemptions, and passive rental real estate losses. Making a QCD also allows the donor to completely avoid the percent-of-AGI limitations that can postpone itemized deductions for garden-variety charitable donations. Perhaps most importantly, a QCD counts as a distribution for purposes of the required minimum distribution (RMD) rules. Therefore, an individual can arrange to donate all or part of the RMD amount (up to the $100,000 QCD limit) that he or she would otherwise be forced to receive and pay taxes on in 2008. Last but not necessarily least, making a QCD will reduce the donor's taxable estate. Observation: The QCD strategy can be beneficial for well-off seniors such as those: (1) who don't itemize (under the "normal" rules only itemizers get any income tax benefit from charitable donations), (2) whose itemized charitable donations would be reduced by the IRC Section 68 phase-out provision and/or postponed by the percentage-of-AGI limitations, (3) who want to avoid being taxed on RMD's from their traditional IRAs, and (4) who are interested in estate-tax-reduction moves. Donate LTCG Securities, but Sell Losers and Contribute the Cash Last but not least, clients should be advised that a charitable contribution of a LTCG asset (such as appreciated stock or mutual fund shares) generally results in a charitable write-off equal to the full FMV of the asset and avoidance of any federal capital gains tax on the appreciation. So, making year-end contributions of long-term capital gain assets is generally a great idea. In contrast, clients should not contribute loser securities (those with current FMV that is less that tax basis). Instead, clients should sell losers, claim the resulting capital loss on Schedule D, and contribute the cash from the sale proceeds. Back To Newsletter
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