Giving Charitably and Doubling Your Tax Benefit

 Many of you are inclined to make large charitable contributions by writing a check.  If the cash is not already sitting in cash, you many need to go to your taxable investment account to determine what to liquidate to create the cash for the donation.  Sure, this can provide you with an itemized deduction to potentially decrease your taxable income*, but might there be a way to make an even bigger impact on your current and future tax liability?

If you hold appreciated stocks or mutual funds in a taxable investment accounts, why not try to avoid paying capital gains tax when you sell to create the cash for your charitable donation?  Did you know that most charitable organizations, including churches and synagogues, can accept a donation of shares of a stock or mutual fund as a gift?  And did you know that in donating this way, you  can avoid paying capital gains tax on a security, and so can the qualified non-profit receiving organizations? 

So, by using an appreciated security, not only can you avoid capital gains tax that could be significantly higher than the 15% top rate we’ve had in recent years, but you may retain the right to use the value of the security donated as an itemized deduction. Double bonus!  (Triple bonus if this also allows you to tax-efficiently reduce an over-weighted position in your portfolio).

Before you write that big check to your favorite charity, consult your financial planner and tax advisor to see if opportunities exist to double your tax benefit by using appreciated securities instead.

This is how the capital gains rates look under the American Taxpayer Relief Act:

0% Capital Gains: 

Those in the 15% marginal tax bracket ($36,250 single filers/$72,500 married filing jointly)

15% Capital Gains:

Those in the 25%, 28%, 33%, or 35% marginal brackets

Those over $200,000/$250,000 but below $400,000/$450,000 are subject to the Medicare surtax, which means that effectively capital gains (and qualified dividends) are taxed at 18.8%

20% Capital Gains:

Those in the 39.6% marginal bracket ($400,000/$450,000).  Because of the Medicare surtax, this means that effectively, capital gains (and qualified dividends) are taxed at 23.8% (and up to 26% during the personal exemption and itemized deduction phase outs).

Sandra Adams, CFP® is a Financial Planner at Center for Financial Planning, Inc. Sandy specializes in Elder Care Financial Planning and is a frequent speaker on related topics. In 2012 and 2013, Sandy was named to the Five Star Wealth Managers list in Detroit Hour magazine. In addition to her frequent contributions to Money Centered, she is regularly quoted in national media publications such as The Wall Street Journal, Research Magazine and Journal of Financial Planning.

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Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

*Note that the American Taxpayer Relief Act of 2012 implemented a phase out of itemized deductions for taxpayers with taxable income of over $250,000 for single filers/$300,000 married filing jointly.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of Raymond James.  You should discuss any tax or legal matters with the appropriate professional.

Logic & Taxes Don’t Mix

A question I get a lot at income tax time is, “Can I deduct investment management fees?” While this should be a straight forward answer…we are talking about the tax code where nothing is simple.  As a law professor of mine once said, never put logic and income taxes in the same sentence.  Your tax preparer is the best person to consult with on this issue – but in the meantime, here are some guidelines:

The first place to start when trying to determine if an investment management fee is deductible or not is to determine the type of account (Taxable, Traditional IRA, Roth IRA, 401k, etc.).

Investment management fees paid in taxable accounts (such as single, joint or living trust accounts) are a tax deductible expense and reported as a miscellaneous itemized deduction on Schedule A of Form 1040.  That’s the easy part – but not the whole story. There is more to the story because not everyone can actually benefit from miscellaneous itemized deductions.  In order to benefit from your miscellaneous itemized deductions, in aggregate they must exceed 2% of your Adjusted Gross Income. As an example, if you have Adjusted Gross Income of $75,000, then the first $1,500 of miscellaneous itemized deductions are not deductible – only the balance can be deducted.  To further confuse the issue, if you are subject to the Alternative Minimum Tax some or all of these deductions could be disallowed as a tax preference.

For accounts such as Traditional IRA’s, ROTH IRA’s, and 401k’s, my interpretation of the tax code is that investment management fees paid by assets in the account are not deductible nor are they considered taxable income. In summary: not deductible (but you don’t pay income on the fee either). That said, some will argue that the fee is deductible, just as it is for taxable accounts discussed above. Lastly, some tax professionals will suggest that the fee is deductible if paid with money outside of the IRA. For example, some tax professionals will suggest that fees attributed to IRA type funds be paid via a separate check making them deductible.

As you can see, there are some gray areas on this topic.  What can you do?

• Be sure to share the fact that you paid investment management fees with your tax preparer
• Break the fees out by account type (taxable versus other types)

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The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.  Please note, changes in tax laws or regulations may occur at any time and could substantially impact your situation.  While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS we are not qualified to render advice on tax or legal matters.