It Doesn’t Have to Be All or Nothing
Making a charitable gift doesn’t necessarily mean that the donor has to part with the entire item. It’s possible to give just a portion and still get a charitable deduction in certain situations:
Retained life estate in a home or farm — Sam contributed his vacation home to charity, keeping a right to use the house for his lifetime. He gets a deduction for a portion of the home’s value.
Undivided interest — Wanda contributes a 10% undivided interest in a vacant parcel of land and is entitled to a charitable deduction. When the land is eventually sold, the charity will receive 10% of the sales proceeds.
Conservation easement — Barbara and Shawn contribute a scenic easement over land that they own near a national park. The easement restricts their use and future development of the land and applies to all future owners. They’re entitled to a charitable deduction.
Partial interests in tangible personal property — Kevin owns a sculpture that the local museum wants for its collection. He doesn’t want to part with it completely yet, but has agreed to contribute a 25% undivided interest, entitling the museum to possession of the sculpture for three months each year. Kevin is entitled to a charitable deduction. The remaining 75% interest must pass to the museum by the earlier of ten years after the initial gift or Kevin’s death.
Some partial gifts do not entitle the donor to a deduction because the donor is not considered to have given up control of the asset. These gifts can nevertheless be of value to the charity, such as where the owner of an office building allows a charity rent-free use of space.
Home Sweet Tax Shelter
Most homeowners view their houses as a place to live and raise their children. But to the IRS, a home is no different than shares of stock that have gone up in value. Capital gains tax is generally due on the sale of real property, with one major exception: Owners can exclude a portion of the gain on the sale of a principal residence — $250,000 for single taxpayers and $500,000 for married couples.
Some homeowners still face capital gains tax on the sale of a home:
- Sally and Roger have lived in the same home for 39 years, but are now ready to move. The home, which they bought for $21,000, is now worth about $750,000, leaving them with significant capital gains despite the $500,000 exclusion.
- Mitch and Claire own a lakefront home where they spent many summers with their children. The home now sits unused most of the year. If they sell, all the appreciation — nearly $200,000 — will be subject to capital gains tax because the home is not their principal residence.
It may be possible to reduce or avoid the capital gains tax by using the homes to make gifts to charity. For example, Sally and Roger could make a gift of an undivided interest in their home — 10%, for example — and reduce the capital gain when the house is sold. Mitch and Claire could use their vacation home to fund a charitable remainder trust that provides them with payments for life from the full value of the home when sold. When the trust ends, the assets would be paid to charity. In both cases, the homeowners reduce or avoid capital gains tax while also securing an income tax charitable deduction.
The Graying of the Boomers
In 1946, when the first of the Baby Boom generation was born, the U.S. population was less than half of what it is today (141 million versus 322 million). The most popular names for newborns were James and Mary; today, they’re Noah and Emma. The generation that was told never to trust anyone over age 30 is nearing, or in some cases already in, retirement.
One common attribute of boomers and previous generations is the desire to create a better world. Gift planning does tend to be age oriented, however:
30s and 40s — Wills and estate plans are generally first drafted when people are in this age range and raising families.
50s to age 65 — People looking toward retirement often find that charitable remainder trusts begin to make sense as a way to minimize income taxes, help charity and maintain a good income for life.
Ages 65 and older — Retirement years may bring a desire for gift arrangements that provide tax deductions and a steady stream of payments that may be part tax free. Many people are reviewing their estate plans with thoughts about the next generation and of leaving the world a better place. Planned gifts can be a most satisfying component of this planning.
Time for a Roth IRA Conversion?
Not all taxpayers with earned income can contribute to a Roth IRA. Single taxpayers with 2017 modified adjusted gross income of up to $118,000 are eligible to contribute the full $5,500, with a $1,000 catch-up contribution for those ages 50 and older. Contributions are phased out until income reaches $133,000, when they are no longer allowed. For married couples, full contributions are allowed on modified adjusted gross income up to $186,000 and completely phased out at $196,000.
Even if you can’t contribute to a Roth IRA, it is possible to switch an existing IRA to a Roth. There are no income limits on who can convert a traditional IRA to a Roth IRA. What are the advantages of a Roth IRA?
- Roth IRAs do not have required minimum distributions beginning at age 70½. All the funds can continue to grow tax free.
- If you’re still working, you can make contributions to your Roth IRA after age 70½. Contributions cannot be made to traditional IRAs after that age.
- Qualified distributions are tax free; withdrawals from traditional IRAs, on the other hand, are subject to tax at ordinary income rates.
- Amounts remaining in your Roth at death are not subject to the income tax that applies to traditional IRAs. The Roth may be subject to estate tax (on estates exceeding $5.49 million in 2017).
The big drawback to switching a traditional IRA to a Roth IRA is that you’ll pay income tax on the amount converted. One way to lessen the tax is to convert only a portion each year or to make the switch in a year when you have high itemized deductions to offset the tax. You might even choose to make a charitable gift of appreciated stock, while retaining payments for life, in the year of the conversion. You’ll generate a charitable deduction and establish regular payments for life.