On-Demand: Year-End Tax Strategies for Individuals & Families

And what we're looking to do today is to give you some basics around your taxes from an individual estate and gift, and also with regard to charitable perspective, just to kind of help you understand some of the different year end planning that you can consider. And there's been three different tax acts that all kind of coincide at this point in time. There's the Tax Cuts and Jobs Act of 2017, the SECURE Act, which had many different things in place for COVID, and also the CARES Act. So there's many different moving parts, and hopefully during today's presentation, we can go through some of these different items to focus on different things that you may have specific questions about.

So our agenda today is to cover income tax planning for individuals, which I will cover, then estate and gift tax considerations, which will be covered by Lisa Herzer, and then philanthropic planning opportunities, which will be covered by Cindy Feder. And at the end, we will try to go over your different questions. And if we don't cover them today, we can reach out to you separately.So from an individual income tax planning perspective, so when putting this presentation together, we wanted to make sure that we can cover specific planning opportunities and doing the session in November so you have some time in December to pull some levers and make somewhat of an impact. But we also wanted to cover some compliance items and just general housekeeping because all of these things become really important when considering your overall taxes. So most of the tax topics that we're discussing today are ones where our clients come to us and ask us questions. Sometimes they ask us those questions in the following year when we're doing the tax return, and then at that point, there's not an opportunity to make a change. So we wanted to make sure that we can talk about some of these things in advance, so that you are thinking ahead.

So as each of your tax situations are different, some of our topics may be relevant to you when others may not. And we've presented them just in general, so there's no kind of order of importance. But when making any tax decisions, it's always important to review your full tax situation to see what may be applicable to you. And this presentation is focused on federal taxation, so however from a planning perspective, you also do need to think of the state tax consequences, but that is not covered here.

So let's jump on into the different topics. So first, we want to talk about required minimum distributions, otherwise known as RMDs. So for distributions taken after the beginning of 2020, the age requirement changed from 70 and a half to 72, so that came in place as part of the SECURE Act. So from a planning perspective, there's two items that we may want to consider. One is foregoing the taxable income by distributing the RMD to a qualified charity, and you can make a distribution of up to $100,000, but you need to make those charitable contributions by December 31st. And another is looking at whether or not it's feasible to do a Roth conversion if that's something that may be worthwhile for you. And we'll explore these things a little bit more.

So a qualified charitable distribution, what is this? So an otherwise taxable distribution from an IRA can be paid directly from the IRA to a qualified charity, and by doing so the distribution of up to $100,000 would not be considered taxable income. And each spouse can contribute up to $100,000 from their own respective IRAs. So this is actually a really potential benefit that you can make. So if you are doing various charitable giving during the course of the year, by making these donations directly, the qualified charitable distribution is excluded from income. And by excluding it from income, that impacts adjusted gross income. And adjusted gross income is used for many different things when considering your taxes, so this is a really, really important thing. By reducing your overall income, that has other tax ramifications when completing your tax return. And by making this distribution to a qualified charitable charity, it also counts as part of your RMD.

So one thing to note is that by doing so, you're not including your required minimum distribution as income, but you also don't get a charitable deduction because that in essence would be double dipping. So we wanted to talk about wash-sale rules because this comes up often. At year end, we do find that our clients try to look at their capital gains for the respective year, and in doing so what they end up doing is trying to identify if: What is their total capital gain position? And is it worthwhile to take any specific losses to reduce that and reduce their current year tax impact? So we mention this on here because you really do have to be careful because the wash-sale rules will prohibit you from selling an investment at a loss and then replacing it with something which is considered substantially identical 30 days before or after the sale.

So this rule was kind of put into place to prevent investors from just taking losses where they didn't bear any market risk of loss. And we often find that some people will try to go and do this at the end of the year, and then when they receive their 1099s, they're surprised by the fact that the sales are categorized as wash-sales. So this is kind of important too, when you're looking at your portfolio, and if you're making any adjustments, make sure that you worked through your financial advisor and that you consider this so that you don't have any surprises when you're looking to complete your tax returns.

So K-3, one of the things that was never for 2021, and I'm not sure that many of you may be familiar with this, is that many of you may be familiar with the K-1, and that is a report the allocation of income and deductions through a partnership or S-corp, so many of you may have businesses where you do entity filings and you have K-1s, or you have investments where you receive K-1s. So for 2021, this form K-2 and K-3 were introduced. And this is a supplement to the reporting relating to your partner's distributive share items. So in actuality, as a tax professional, the addition of these forms created a lot more work for us when we're completing entity returns, and also when preparing individual returns because it's just so much more data.

But these forms were put out there to indicate international tax matters, so it really is to cover different things that the entity is passing through to its partners for international reporting. And what we're seeing is that a K-1 may have been five pages long, and it had some supplemental pages or footnotes. And then with the addition of these extra forms, K-1s have turned to be 50 page documents, and there's a lot of information in there. And that information does align with different reporting. So the K-2 in definition is an extension of the schedule K, and it's used to report items of international tax relevance from the operations of a partnership, whereas K-3 is an extension of a K-1 and it's used to report the partner's share of the items from the K-2. And these items include foreign source income, foreign taxes paid, and other items for the preparation of form 1116 relating to foreign tax credits.

But it also includes a lot of other informational items. One that we kind of noted here was 8621. Now this form, 8621, relates to an investment in passive foreign investment companies, also known as PFICs. And this data will be on these forms. And I raise this because you really need to understand when you have these different investments, if they have different international aspects because it has a lot of reporting on your tax return, and although this may not be a planning concept, it's a tax compliance concept. And as a result, anything relating to international that's not reported correctly can result in significant penalties. So what happens after issuing these forms, the IRS realized that there was a lot of confusion, so they have offered maybe some potential relief for the completion of these forms.

So what we are seeing is that right now there's an exception that if there's a domestic partnership that does not have any international tax matters, meaning no foreign partners, no foreign activity, that they may be exempt from completing the K-3 forms, which definitely eases the burden of an entity and individual, and also provides assurance that you don't have any international reporting. Anything regarding international, definitely discuss with your tax provider because we want to make sure that the proper forms are completed. Okey-doke. All right, so we're a few minutes into the session, and we are at our first polling question.

Bella Brickle: Poll #1

Patricia Kiziuk: We tried to keep the polling questions simple because we know it's very important to get your CPE before year end. And we're hoping that all of them are going to get 100% the right answers as well.

Okay. So someone actually had put this question in here, and I Googled it last night, and there was actually a full article about this that the day after Thanksgiving is the busiest day for plumbers, and a lot of it relates to people putting grease and things down their garbage disposals and also having a lot of family members and usage in their house, so I thought that was quite interesting.

All right, now we'll get back to some fun tax stuff. All right, the CARES Act for itemized deductions. As many of you may be aware is that when you're doing your individual tax return, you can claim either your itemized deduction or your standard deduction. And beginning in 2018, they increased the standard deduction and they reduced what was considered an itemized deduction. The biggest item related to what we call SAL taxes, state and local taxes, so historically prior to that enacted at the end of 2017 is that most individuals, especially if you live in New York, New Jersey, California, where there's high income tax states, most individuals would claim a deduction for their state and local taxes, and have other types of deductions, charitable, mortgage, and those things.

But with that change in the tax rule, state and local taxes and property taxes are limited to $10,000, so that's an important thing to note. And we're going to maybe show an example of that. But one of the other things with the CARES Act is that there was different changes to charitable contributions and how much you can claim as a deduction. Your charitable contributions are limited based upon the type of contribution and your AGI. So for example, prior to the Tax Cuts and Jobs Act, the percentage limitation for cash donations to public charities were 50%, and then that was then increased to 60%. And there's all different percentages related to donations of appreciated property and other donations to five year, making to private foundations.

Now if you, based upon your AGI and the percentage and the type of contribution, if there's a limitation, your contributions in excess of these limitations can be carried forward for five years, and then subject to the limitations in the future years, so it's really important to know when you're making contributions, the type of donation that you're making and having an understanding of your adjusted gross income to understand how much would actually be deductible.

So one thing that happened with the CARES Act is that, for example, I was saying that with cash contributions that they're deductible up to 60% of your adjusted gross income. For 2020 and 2021, those limitations were suspended, so that didn't apply. But now we get to 2022, this no longer applies. So if you may have made more deductions in prior years, now you need to be aware that we are kind of going, flipping back to the prior rules. And there's a lot of things with the tax rules that are like that, where certain relief was provided for 2020 or 2021, which no longer applies for 2022, so you have to be a bit careful of that.

The other thing is there are ordering rules with respect to charitable contributions and how much you can give. So we're going to go through a quick example of that, but what I would always say whenever doing anything of this nature, it's always good to talk to a tax professional and also the IRS publications are really good because these things are constantly changing, limitations and other things, and there's always different nuances with the rules that you want to make sure that you don't miss out on any particular deduction.

So here's an example to kind of bring it to life. In this example in 2022, Jackie expects her AGI to be $1 million, and she made a donation of appreciated long-term securities to her family foundation. So the thing to note here is that since her AGI is $1 million, and she's going to make cash contributions, she can make cash contributions up to $600,000, up to the 60%. However, since she is making a donation of appreciated long-term securities to a private foundation, that's limited to 20%, so that particular $300,000 donation, she would only be able to deduct $200,000 of it, and $100,000 can be carried forward to 2022. So if she otherwise did give cash donations, she could take a full charitable contribution of $600,000. But from an ordering perspective, and from a type of donation perspective, that donation to the private foundation would be limited.

One of the things that we are seeing our taxpayers do is bunching of charitable contributions. And this kind of goes through a full example, and I'll skip over to the actual table, which I think is clearer. But in this particular case, a couple typically has $10,000 of property taxes each year, and they normally make $30,000 of charitable contributions each year. And the view is that: If you look at a five year window, is there any way to bunch their charitable contributions to maximize the overall deduction? And I'll skip to the next page, which kind of shows the calculation of that.

So in a standard year, if they're making $30,000 charitable contribution, property taxes, that's $40,000 of deductions. And if the standard deduction is $28,000, it's better for them to take the itemized deduction. Over a five year period, that would yield $200,000 of deductions, so that's kind of what the standard will look like. And if they decided to front load those charitable contributions, maybe make a $150,000 donation to a donor advised fund and put that in year one, what will end up happening is that their itemized deductions for year one will be $160,000. And then when you look at the total deductions over that five year period, the total deductions would be $272,000. So by bunching it, you are able to kind of utilize more of the charitable contributions over the course of those years. And a $72,000 increase in the deductions with somebody who's maybe in the 35, 37 tax rate, that ends up being a $26,000 tax benefit, so it is real money.

In looking at this example, the one thing that I was thinking about was that many people may not be comfortable doing things over a five-year period because they don't ... The market, as I noted earlier, is very volatile and we're in a high inflation environment right now. They might have said well, may not be comfortable making such a large contribution in one year. And what I often see is that individuals will kind of double up their contributions over a two year period. So for example, making a donation at the end of 2022, which in essence covers 2022 and 2023, so you're kind of covering off on two years.

Now using these numbers, and I don't have a slide for it, and I'll just kind of work through the math, if you did that, if they made a $60,000 contribution at the end of 2022, which covers '22 and '23, that means that their itemized deductions in year one would be $70,000. Year two, they would claim the standard of $28,000, so that's $98,000 versus the $80,000 that they would complain if they were just doing everything kind of across the same year. So that would give you additional $18,000 of deductions, and again, once you take the tax effect of that, over $6000 of tax savings, so that's something for you to think about for yourself for this year. So if you are going to do different deductions, maybe do more in December to kind of cover off on both years.

Excellent. So planning with retirement plans, so one of the items that we wanted to touch base on is the back door Roth. This is something that we're seeing is becoming very popular, and it's a really good way to overall increase the value of your retirement account by kind of using this approach. But there's definitely different things it ...

kind of using this approach, but there's definitely different things that can be done with retirement plans and we'll just kind of focus a little bit on this backdoor Roth concept. So with the backdoor Roth, many of you are probably aware that there are different caps on making IRA contributions. And this could be based upon age, it's also based upon income. But for the backdoor Roth, what is typically done is that an individual may make a contribution to a non-deductible IRA account. Once the money is in that account, shortly after the contribution, the IRA is converted into a Roth IRA. And you want to do that within a relatively short period of time, and usually after you contribute the money, you don't want to invest it in something because then the value of it will change. But by doing so, basically you're taking that full contribution and then converting it into a Roth IRA.

And if you're doing this year upon year, it can yield a significant value to you because distributions from a Roth IRA are not taxable and there's no RMD requirements for a Roth IRA. So overall it does have different benefits. Sometimes when people start doing these backdoor Roth contributions, they may also want to convert other monies into their IRAs to a Roth. And when you're doing so, you just have to remember when you are converting money into a Roth IRA, it is taxable at that time, but then it would be tax free later on when you go doing that. And you also have to be aware of what they call the five year rule. So if you convert funds into a Roth IRA, you do need to wait five years before you start taking distributions, otherwise there'll be a penalty. So there's different things to consider, so you have to really look at your investment strategy and what you want to do, but this is typically a good way to have money for your retirement and having in it in a tax free way.

Okay, we're up to the second polling question.

Bella Brickle: Poll #2

Patricia Kiziuk: Excellent. And this was actually something that I Googled as well because I didn't write the question and there is actually an article where it lists out all of the different Thanksgiving dishes and they're all rated. So, tofu was listed as the number one most hated. So who would've known?

Okay, so back to tax. So I included a slide in here about kiddie tax and the reason why we did this is more for knowledge, and often we find that we're working on someone's tax return and then they will say, "Oh, you know what? My child received this or they had..." And a lot of times we're just not even aware of monies may have been put into an account by a grandparent or somebody else and they're just not even aware of what's there and not focusing on it. So that's why we included this slide here because we didn't want people to be surprised by it.

But if you have a child with investment income or other earned income, once it exceeds $2,300, the tax on that income is at the parent's top marginal rate. So sometimes people just can say, "Oh, well the kid doesn't have that much income," but then they're surprised by the fact that there is actually taxes that are due on the different amounts. And with income for a child, you can file a separate return and normally there's a requirement to file a separate return for the child if there's actually stock transactions and they received a 1099-B or if they had withholding, maybe another reason why you know would file a separate return for your child but you can also elect to include that on your tax return. So you also want to take a look at what accounts you have for your child just to kind of understand.

So we were talking previously about harvesting losses and looking at your information and you really wanted to also make sure that you do that for any children's accounts to make sure that you're not paying tax on this income at the highest rates.

So, limitation on business losses. So again, this was something that we've included in here because when we're preparing tax returns, this ends up coming up quite a bit. So with the tax cuts and Job Act that was signed in December of 2017, this was introduced as a new limitation on business losses and there has been a little confusion on how to calculate the business losses and how this actually works. But in essence, what did happen is that there's this form 61 and the form 61 is to help to accumulate all the business income and all the different items to arrive at what the actual business loss is. And there are loss limitation thresholds based upon if you're married filing joint or in other filer.

But basically in essence what happens is that under this rule you're disallowed losses if you exceed that particular threshold. The loss isn't gone forever, it would be carried forward as an NOL, but we do raise this because as you're looking at your information for the current year is that sometimes it may be an opportunity to, if you believe that you are in a loss position to accelerate income into the air so that loss does not need to get carried forward that you can actually claim it this year and make sure you do some offsetting. So that's actually the planning aspect of it. But from a documentation perspective, it's really important to understand if you have different activities, if you're engaged for a profit motive and really taking a look at all the different items rather than looking at it when you're going to do your tax return to understand what your current status is.

All right. So, as we really get into year end planning, I said at the beginning, I think a lot of year end is about good housekeeping and thinking about the compliance. So in having all of your information together and what we are seeing is that last year many individuals did have large capital gains and so they may have based their estimated tax payments and other items based upon 2021, but 2022 is not turning out that way. So where if you're currently making estimated tax payments based upon safe harbor, you may not need to make those payments, the fourth quarter payment because you might have losses for this year, but you do want to assess what that is.

One of the things that also really came into play in 2021 are these pass through entity taxes. So they are flow throughs from partnerships and S Corps and for 2021, many of the states started to allow you to pay the taxes at the state level and then in return, you would get a deduction on the federal side. So since a lot of the elections did occur in 2021, a lot of the taxes were not actually paid until 2022. So this might be something new that you weren't expecting for 2022 and it may impact your overall estimated tax payment requirements for the year. So you might have more deductions than you expected from the prior year. One other item to review is stock options. If you do have stock options, determine whether you want to exercise them now or just disqualify them to see what is best from an overall financial perspective and looking at your different losses.

Always remember that a lot of companies will issue capital gain distributions in December. So, keep that in mind when you're looking at your overall tax situation. And another easy way to get some additional deductions is to make sure that you've maximized the contributions to any of your tax deferred accounts; IRS, 401ks, we were talking earlier about doing a backdoor Roth, you have a little bit of time to do those but you want to make sure if you have tax deferred accounts that you utilize those effectively. And with the pass through entity taxes, we are also seeing that some people that are working as maybe single member LLCs or Schedule C businesses are converting into partnerships or S Corps to be able to take advantage of the pass through entity tax. So that requires a lot more steps but it is something that we are getting a lot more questions about because it is a benefit if you have an income-producing business and are able to take additional deductions for your state and local taxes.

So as I noted earlier, 2020 and 2021, there were lots of different things that were allowed which were now kind of reverting back. So one of the things like a child tax credit, that was increased to provide a boost to everyone because people were struggling with COVID, and now these things are reverting back to the 2000 levels. So that kind of happens with the child tax credits, the child and dependent care credits, things are kind of reverting back to the pre-COVID levels. So also the other thing is that there was this charitable contribution that was allowed on top of the standard deduction and that was kind of eliminated for 2022 and going forward. Again, that was just to kind of boost some charitable giving to individuals and so people to give allow sort of deduction which they've now eliminated. So these are the things to keep sight of because what you may have done in 2021 may not necessarily apply for 2022.

Okay, so we're going to kind of wrap up on the individual side. I think when I think of tax and year planning and things like that, I think the most important thing I think is really good housekeeping, really understanding what you have, and you would be surprised that when I talk to individuals that were going through some of the things, tax documents that they received to do their tax returns, a lot of times they're not aware of different things, sometimes they're not aware of different bank accounts or foreign accounts or other things. So I would always suggest that you do a complete inventory of everything you have, so spend a little time to take a look at what your assets are and your investments are, just to understand the content of it and then take a deeper look at it and say, "Okay, well where are these different documents?"

I mean one of the things that, for example is if you are a homeowner and you've made improvements to your property, you may not be selling your property now, but what will happen is that if you go to sell the property a few years from now, you'll need to know what that information is because it will have an impact in the future. So there are things that when you take a look at all your tax information and documents that may not be relevant for the current tax year, but may have implications in future years. So it's a good time to organize things and understand what you have.

At least twice a year you should be checking your pay stubs and tax withholdings, although you may be with the same employer, we often find that there are errors there and if you receive other types of payments like bonuses or supplemental with supplemental types of payments, the withholding rate is typically less and that does create a shortfall. And to be able to manage your cash and to really understand your tax, it's a good thing to look at that.

Maximizing your retirement contributions, we talked a little bit about that. Reviewing all sources of income and are there things that you can accelerate? Are there things that you want to push into next year? So by having a good view of the full picture, you can then make those decisions at what levers to pull. Reviewing your deductions, charitable, any gifting. I know Lisa will be talking in a few minutes about estate and gift taxation, but are there any gifting and making sure that that's done before year end. And you don't want to lose sight of any credits, education and energy credits, and there's different things that are out there. So we got two more; zeroing out your flexible spending account, a lot of those accounts are use it or lose it so you don't want to lose that.

And lastly, I wanted to end on an overall housekeeping note regarding having an IRS online account. We are seeing more incidents of identity theft. So you can go onto irs.gov and set up your online account and when you go into your account, you're able to see that your tax returns are filed, refunds are issued, the payments that you've made. If you have a security pin that was issued to you, that those details were there. If there's other correspondence, you'll be able to find that there. So it's a really good thing to have an overall view of your entire account and just to make sure that everything is fine. Because I know we often get a lot of people get calls and various correspondence from people claiming to be the IRS and this is a good way to really ensure that you understand what you have and what's going on and that you do not have any issues there.

So that kind of covers the housekeeping side of things. At this point I will send it over to Lisa to allow her to talk about estate and gift tax considerations. You're muted, Lisa.

Lisa Herzer: Oh, I hit it twice. I apologize. Welcome everyone to the estate and gift tax portion of our presentation and thank you Patty. The estate, trust, and gift tax world has been relatively quiet in terms of tax law changes and case law this past year. A significant amount of gifting was done in both 2021 and 2022. Slack creation and funding was definitely higher than in previous years. For trusts, year end planning of similar to what Patty just discussed for individuals in terms of tax loss harvesting, especially considering how quickly trusts are subject to the highest tax rates. Estimated taxes, again like individuals, look at the actual gains for 2022 as 2021 gains were more likely higher and the trust may not need to make a final 2022 estimated tax payment in January or that payment may be greatly reduced if you use 2021 safe harbor for the first three payments. Again, like individuals, PTET deductions may result in lowering taxable income in 2022, also reducing required estimated payments.

The 2023 amounts for exclusions and exemptions were recently announced and are as follows. The annual gift tax exclusion, which increased to 16,000 in 2022, once again increased and will be 17,000 in 2023. Always a good idea to make those annual exclusion gifts early in the year. The annual gift tax exclusion for gifts to a non-US citizen spouse is going from 164,000 in 2022 to 175,000 in 2023. The gift and estate basic exclusion amount as well as the GST exemption amount increased by close to $900,000 to just under 13 million for 2023. It's definitely a good idea to use this significantly increased exclusion amount for additional gifting in 2023.

It's important to remember that those increased exclusion amounts I just referred to are scheduled to revert back in 2026 to 5 million, however adjusted for inflation, but we don't know what that exact amount will be yet. It's also important to note that you must use it or lose it for the bonus exclusion. In other words, if you have gifted less than the exclusion amount when it reverts back, that amount will reduce to the new lower exclusion amount. The bonus exclusion a taxpayer may have received from a pre-deceased spouse, however, does not revert back in 2026. So you get to keep that exclusion that you've received from your pre-deceased spouse. And even if your wealth transfers are complete or your estate is less than the exclusion amounts being discussed, you should review your documents to be sure the increased exclusion amounts don't provide unintended results. For instance, in formula based planning, if someone died in 2023 with a typical credit shelter formula clause, that trust would be funded with almost 13 million, maybe not the intended consequence. So to Patty's point about housekeeping, I tell everyone they should be reviewing their estate planning documents annually.

So, some planning ideas with the doubled exclusion amount and GST exemption. Forgive family loans. Top off existing trusts. Pre-fund life insurance trusts with current as well as future premium amounts. Consider a late allocation of the GST exemption to existing trusts, especially beneficial for those with remaining GST exemption and no remaining gift tax exclusion.

So I included this slide so you'd have it for your files about SLATs, but we discussed SLATs last year and many people have already done them, so I won't be discussing them in full as I did last year.

So, plan now rather than later. There are those that are waiting to make their gifts until 2025 to utilize all of their increased exclusion. There is the possibility, however, that the exclusion amount could be reduced before then. With such a large increase in 2023, even for those who had planned to wait perhaps to gift until 2025, 2023 may be the year to use your remaining exemption as the appreciation on such a large gift will be significant. By gifting in 2023, you'll be able to remove the appreciation from 2023 through 2025 as well as the gift itself from your estate. The bear market has everyone avoiding looking at their broker statements, but a bear market can be seen as an opportunity to gift assets at a low value using less exemption. However, don't forget to consider the loss of basis step up when gifting. So pay particular attention to which assets you select to gift.

Consider changing the assets used for post-death charitable bequests since your IRA must be withdrawn within 10 years under the Secure Act by most beneficiaries, perhaps name the charity as the beneficiary of your IRA instead of a cash bequest and leave the cash to your non-charitable beneficiaries. The cash bequest has no income tax consequences to the non-charitable beneficiary, unlike the IRA. Cindy will discuss charitable lead and charitable mains or trust in the next sanction on philanthropic planning.

And we have our next polling question.

Bella Brickle: Poll #3

Lisa Herzer: Pretty good. So 2026 is the correct answer. That is when it's set to revert back to the five million, however, it will be adjusted for inflation. So let's talk about interest rates for a little bit. What a difference a year makes. I included last year's interest rates on the slide so you can see the significant increase in the rates. The November 2021, for instance, 7520 rate was 1.4%. For November 2022, that rate is 4.8% for the 7520 rate. So that's a significant entry increase.

We have had over a decade of low interest rates, and a low interest rate environment is good for GRATs, sales to intentionally defective grantor trusts and intra-family loans, but bad for QPRTs. The December rates were announced also, and are even higher than November. So if possible, complete any transactions before the end of the month if you were doing any of this planning strategies. The intra-family loan is perhaps the easiest way to plan when interest rates are low. A family member receives a loan, most times as interest only, with a balloon payment at the end of the term. If the assets purchased with the proceeds from the loan appreciate more than any interest paid on the loan, that appreciation passes gift tax-free to the borrower. It is important to be sure the loan is documented.

Since QPRTs haven't been used in many years due to the low interest rate environment, I thought I would touch upon the basics of their structure since some may not be familiar with them. A qualified personal residence trust is used to transfer a personal residence to beneficiaries of the trust. Many times it is a vacation home that is the asset being transferred. The QPRT lasts for a number of years. After that initial term, the residence passes outright to the beneficiaries or remains in trust for those beneficiaries. During that initial term, the grantor uses the residence. After the trust term ends, the grantor may rent the residents at fair market value from the trust or the beneficiaries.

The initial transfer of the residence into the trust is a taxable gift, and the value is the remainder interest using the 7520 rate. Therefore, the higher the rate, the lower the value of the gift, which is why it's done in a high interest rate environment and not a low interest rate environment. One of the risks of the QPRT is the mortality risk, because as the granter needs to survive the initial trust term, otherwise the residence is included in his or her estate. Another risk or consideration is the income tax consequences if the beneficiary decides not to keep the residence and sells.

So, proposed changes for 2022 and beyond. Will any changes occur before the end of the year? Most likely not, especially with the way that Congress has wound up. And what about 2025 or before 2025 or after 2025? Possibly. No one has a crystal ball and estate planning is difficult enough, but we have to just plan with what we have. So if you want to discuss anything that I've had in these slides, feel free to reach out to me. And we'll have another polling question.

Bella Brickle: Poll #4

Lisa Herzer: Very good. I was hoping for closer to a hundred percent since I forgot to change that slide from last year, but close to 60% was good. So the next section will be about philanthropic planning opportunities and Cindy Feder will be the one to guide you through those.

Cindy Feder: Thanks, Lisa. So, Patty went through some of the information on charitable giving already in her presentation, but I'm going to be elaborating and also giving some more information on the topic. Giving to charitable causes that are close to your heart is extremely rewarding. Nothing feels better than being able to give back, and charitable giving seems to continue growing. According to a report by Giving USA, in 2021, charitable giving was 484.85 billion, which was up about 4% from 2020.

Approximately 67% of the charitable giving is from individuals and about 30% of annual giving is done during the month of December. So now is the perfect time to discuss the topic and the different opportunities that you have to give. While a big part of the giving relates to people wanting to help one another, as always, there's a relationship between philanthropic giving and the income tax deduction that you can receive.

Planning for your philanthropic giving should be incorporated with your income tax planning. The TCJA eliminated or restricted many of the other itemized deductions in 2018 through 2025. So with charity being the one deduction that does remain, it becomes very important. Whenever I look at a tax return and you see the AGI is really high and there's hardly any charity and they're using the standard deduction, I always just think it's a missed opportunity in so many ways.

So obviously charitable deductions are more valuable in years that you have a higher AGI and a higher marginal rate, and as Patty discussed and gave a great example for, a lot of people are doing their planning, looking at a two-year income tax projection in order to time their charitable deduction for optimal benefit. There's a lot of different charitable vehicles that people can use to put their philanthropic planning into effect, and we're going to go through a lot of those later in the slides.

So Patty has touched on this, as well. When you're looking at your income tax deduction and what you're going to get as a deduction for doing your charitable giving, you have to look at your AGI limitation, the type of property that you're giving, and also the status of the exempt organization. So this is a question that's always being asked. "How much am I going to get for cash? How much am I going to get for property? And to which charitable organizations should I be giving to?"

So you can see from this chart that public charities, publicly supported charities, they have the best rate. So if you're giving just cash only, it's going to be 60% of your AGI, and if you give property, that's going to be limited to 30%, but non-operating or grant making, private foundations have a lower deductibility for AGI purposes. So over there, you're going to be limited to 30% for cash and 20% for appreciated capital gain property. And then we just wanted to put down private operating foundations. The private operating foundation is a type of foundation that does its own programming, it doesn't just give grants, and that one has the higher deductibility, similar to a public charity. Where you give is important. Just also to reiterate what Patty said, anyone who's still looking for that 100% AGI deduction, going forward, it's gone. That was special for 2020 and 2021 only. So we're back to these rates.

When you have an excess amount, we try to plan our charity so that we can give it in a year that we can deduct it, but at the same time, you don't have to worry about giving too much in a given year because the excess does get carried forward. And this example takes us through that and it illustrates exactly what happens. So if Grace makes a cash donation to her private foundation of two million and her AGI is four million, her charitable deduction is 1.2 million, which is going back to that 30%. So the excess amount that she has, which is 800,000, is carried forward to the next five years.

So again, a lot of planning has involved bunching for charitable distribution and making those contributions to donor-advised funds or private foundations. So in one year you get to take the itemized deduction by putting a lot into a DAF or a private foundation, and then those funds could be paid out from those vehicles over a number of years, subject to the provisions of the code. And again, just a reminder that at the bottom of the slide that the AGI limitations for donor-advised fund is also the 60% for cash and 30% for capital gain property. The only time the donor-advised fund was singled out and not treated like a public charity was for that hundred percent. They didn't allow for that benefit for a donor-advised fund, but that's not applicable anymore.

Okay, so we talked about the deductibility, we referenced donating appreciated property, but on this slide, what we're trying to show is the benefits of that and why would someone want to give appreciated property versus cash? And it's basically about the deduction that you're going to get, but also the tax savings. So this slide illustrates how in most cases, it would be better to donate the property because you're avoiding that tax on the capital gains. So it's like a double benefit.

Again, also just some things to keep in mind of your giving, planning out your charitable contributions at the end of the year. Make sure that you have a legal transfer for your charitable gift at the year end. Never use securities, but the fair market value is lower than the cost because you're going to be limited to that fair market value and lose the benefit of the capital loss. So it would always be better in that situation to sell the stock, take the loss, and then donate the cash to charity. So you'd be surprised, but there are definitely people who still come and say, "I'm thinking of giving property that's not appreciated. The fair market value is lower," and it doesn't really make sense. And even if you think that stock is going to go up in the future, better to hold it in your own portfolio and then transfer it to a charity at a point in time when it makes sense from your tax planning perspective.

So also, if the stock is short-term capital gain property, meaning that it's held for less than 12 months, then the deduction is limited to the lesser of the fair market value or the tax basis. So generally, we don't see people giving short-term capital gain property. The focus really is on long-term appreciated capital gain property. And also, if the property donated as inventory or subject to depreciation recapture, again, you're going to have those limitations kick in. You're not going to get the fair market value necessarily. You'll have the lesser of the fair market value or the basis. So definitely a good idea to focus on what you're giving.

Okay, and we came to the next polling question.

Bella Brickle: Poll #5

Cindy Feder: Okay, so I guess this is really everybody's own personal, how much they eat, but what I actually saw online was that it was actually 4,500. So I think we should all just be aware of what we're eating this Thanksgiving and make sure we're closer to the 3,500 or the 2,500. So that's the answer.

Okay, so the next couple of slides go through the donation of artwork, and the reason we're using artwork, it's really we're just talking about any kind of tangible personal property and artwork is a good way to go through the rules that apply to that type of property. So the rule that applies to artwork is if the items that's donated to the charity is used by the charity for its exempt purpose, then a person can take the full fair market value of the donation on their tax return. So basically, if someone's going to give a painting to a museum, the deduction's going to be... you'll able to take the full fair market value.

But if the same painting is donated to a social service agency or some other charity that doesn't really have a mission of showing artwork, it's going to be limited to the lesser of the fair market value or the basis. And another thing definitely important to keep an eye out for is that if the charity disposes of the property within three years, then the donor's going to be required to include as ordinary income for the year of the disposition the difference between the charitable deduction and the donor's basis. So if they sell it, you lose your deduction pretty much. So you'll have to definitely work with the charities and make sure that you're on the same page when you're giving something like this.

The next slide talks about fractional interest. So that's when you're trying to give a donation, but you're not necessarily giving it all at the same time. And sometimes when people donate artwork, that's how they structure it and they give an undivided portion to a charity to use that property in connection specifically with its exempt purpose. So for this type of donation, the initial deduction is going to be computed by multiplying the fair market value by the fractional interest contributed. But you have to remember here that subsequent deductions are limited to the lesser of the value at the time of the initial donation or the subsequent donation. So that just sounded like a mouthful. So we'll give an example to illustrate exactly how that works.

Back to Grace, she donated an interest in a painting that was valued at 400,000 for three months, and she retains the painting for the rest of the year. So her charitable deduction is going to be 100,000, which is 25%, which is three months of the year is 25%. So she gets 25% of the 400,000. So later on, if she decides to give an additional three months interest and let the charity have it for six months and she has it for six months, then even if the fair market value is higher now, the fair market value is up to 500,000, her charitable contribution for this second 25% is still only 100,000 because it's going to be based on the lesser of the amount, the fair market value at the time, or the fair market value at the time that it was donated.

So another thing to just think about with this is you really have to be sure that you want to give something before you start giving off fractional interests, because there's a concept of recapture, and that's going to happen if you make the initial fractional contribution and then you fail to contribute all of the remaining interest in the artwork to the same donee by the earlier of 10 years from the initial fractional contribution or the date of your death. So that's called the specified period. And recapture consists of an income inclusion in the year in which that takes place. And then you have to recognize the amount that was previously deducted plus interest running from the due date of the return for the year of the deduction until paid and a penalty of 10%. So like I said, never start giving off fractional interest in anything unless for sure you want to at some point give the entire thing.

Okay, so here's also just some things to keep in mind when you're giving artwork. You have to have it appraised. So you're going to have to make sure that there's appraisers available to do that, you have to make sure the charity wants the artwork and you have to make sure they're going to not sell it within three years and just cause you to have to report the income. And then you definitely have to make sure that they're using the artwork as part of its exempt purpose, because otherwise you're not going to get that fair market value.

Okay, so now we're up to talking about all the different type of charitable vehicles. So the first two charitable vehicles we're going to talk about are split interest trusts. So split interest trusts are trusts that are partially charitable and partially have some interest retained by a non-charitable beneficiary. So the first type is called a charitable remainder trust.

The hint to what the charity is going to get is in the name of the trust. So they're going to get the remainder, they're going to get the lump sum at the end. So this charitable remainder trust is going to provide an income stream to a non-charitable beneficiary during the term of the trust. And then again, it's the remainder, the one lump sum that's going to be distributed to the charity once the term of the trust is coming to an end.

So the type of income stream to the beneficiary is what's going to determine what type of charitable remainder trust it is. Those of you who've ever heard CRAT, CRUT, those aren't really interchangeable. They're both types of charitable remainder trusts, but a CRAT, or a charitable remainder annuity trust, pays a fixed amount based on a percentage of the initial trust value. So every year, the non-charitable beneficiary is going to be getting exactly the same amount. It's one fixed annuity, and that's what the non-charitable beneficiary gets.

And a charitable remainder unitrust, or what's referred to as a CRUT, pays the non-charitable beneficiary a fixed percentage of the trust's annual fair market value at the end of the year. So that's going to be fluctuating. If you have sales going on in there, you might go down. If you're leaving everything alone and the fair market value is growing, then that payout amount every year could be higher. And some things to just remember about this type of trust is that it's irrevocable. The term of the trust can't be more than 20 years. The annuity payout has to be at least 5%, but not more than 50% of even the initial fair market value of assets transferred for a CRAT or the year end value for a CURT. So we see a lot of CRATs and CRUTs at 5%, 6%, those are a lot of the times the go-to percentages.

And lastly, to remember that there are gift tax consequences for setting up a charitable remainder trust if your beneficiary is not the grantor. So it sounds pretty complicated, but there's big advantages to having this type of charitable vehicle. You get a charitable deduction for the present value of the remainder interest that's going to the charity while you're also deferring capital gain and creating an annuity stream for the non-charitable beneficiary. So the assets can grow there tax-deferred since the income tax was paid only to the extent that there are annuity payments. So that pretty much wraps up the charitable remainder trusts.

The other trust that's an option, a different type of split interest trust is called the charitable lead trust. So again, the hint to when the charity's getting the money is in the name of the trust. So for a charitable lead trust, it's the charity that's going to be getting the money upfront in these annuity streams, and it's the opposite of a remainder trust. So it's going to be the non-charitable beneficiary who's going to get that lump sum at the end. So what this vehicle does is it efficiently transfers future appreciation to a person's heirs. The present value of that remainder interest is what's subject to the gift tax. So the future appreciation escapes the gift tax to the extent that the asset is outperforming the-

Cindy Feder: Gift tax to the extent that the asset is outperforming the IRS 7520 rates, which are used to calculate the remainder value. So more assets are being passed to the non-charitable beneficiaries at the end tax-free. So CLTs get set up in two different ways. So they can be set up as a grantor trust or non-grantor trust. And you could see the differences listed out at the bottom of the slide. So we could just go through them quickly. The grantor trust, when you have that set up, the grantor can take a charitable deduction at the time the charitable lead trust is established. And it's beneficial since the IRS 7520 rate has been relatively low, resulting in higher charitable deduction. And it's the grantor that's taxed on the annual income when you have this type of setup. Then you can also structure it as a non-grantor trust. But for this one, there's no charitable deduction that's allowed and the trust itself is taxed on the income. So that's the differences between those two.

So now we're coming to the next polling question. Oh, sorry. No, we're not. So here is actually just a slide that's really just giving a visual of what I just said. So basically the grantor transfers the asset to the trust, the charity is the one receiving the annuity, the grantor is paying the tax on the income if it's a grantor trust. And at the end of the day, the remainder goes to the heirs. So this is just a nice visual that explains the benefits of a charitable lead trust and how it actually works.

And now is the polling question.

Bella Brickle: Poll #6

Cindy Feder: Okay. So even though I tried to give some hints, I guess I wasn't clear enough with my hints. But the name basically explains who's getting the annuity and when the charity's getting the money. So again, with the charitable remainder, any kind of charitable remainder, the charity gets the payout at the end in one lump sum. And it's the charity, the lead annuity trust, that's the one that will get the steady flow of income and get the annuity. So that's the answer.

Okay. So when we talk about bunching and putting a lot of money towards charitable giving in a certain year, some people don't necessarily feel so, so comfortable giving all of that out. They can't decide which charities to give to. And there's the two next vehicles that we're going to be speaking of, are ones that a lot of people will utilize in order to sort of facilitate that bunching, but also have the money not necessarily paid out all at once straight to the charity.

So the first one is a Private Foundation. So a private foundation is a foundation that is its own legal entity. It's usually set up as a corporation or a trust. And they apply for a tax exempt status with the IRS. They have to file a Form 1023 and ask for exemption. They have to register with the Attorney General and they also have to do annual filings every year. It's called a Form 990-PF. They also have to distribute at least 5% of the average non-charitable assets each year or be subject to severe penalties. So you're putting your money in here, but you don't necessarily have to pay it all out at one time. So the requirement here is that you pay out at least 5% every year of the average fair market value. And you actually have until the end of the next tax year, when you're looking, let's say, at 2022, and you say, "My average fair market value is a certain amount," you don't have to pay out that 5% until the end of the next tax year.

So there's a lot of leeway here, but you really do have to be careful that you stay on top of it because the penalty is 30% of the undistributed amount if you don't make the payment by the correct time. So this type of private foundation also has an excise tax. So a lot of times what people will put in here is appreciated stock, or they'll do investing through their private foundation.

So a private foundation does have an excise tax on their net investment income. So it sounds, "Oh no, I'm putting it into a charitable entity, but now I'm paying tax." But the tax is just an excise tax. It's 1.39% of the net investment income. So it really, really is not a significant amount. So a lot of planning around private foundations is people taking appreciated stock and putting it into their private foundation and selling it there because obviously the 1.39% tax rate on a capital gain is a lot less than what an individual is going to pay. So definitely a good strategy and a good way to use your private foundation.

And some other regulatory considerations, these are unfortunately a lot of the calls we get when people have a private foundation. And they tell us things after the fact. One of them is taxable expenditures and that's penalties for expenditures that are made to other than public charities. So there's ways through a private foundation where you can have the flexibility to make certain types of payments other than grants just to public charities, but there's a lot of rules around them and things called expenditure responsibility where there's reporting back and forth. And if those rules aren't followed, then sometimes even with great charitable intentions, people find themselves in a situation where they have to pay a penalty. So always a good idea if you're making a grant to something other than a public charity through your private foundation to talk to somebody and say, "Are there any rules about this? What do I have to do to make this work?"

And then the other problem area is called self-dealing. So what self-dealing is, is penalties that when a disqualified person or an insider, an insider is generally like a foundation manager, a board member, an officer, a substantial contributor, family members, when they take, receive some sort of benefit from the private foundation. So I have never really gotten so deep into this area before, but because this area is almost a pitfall for a lot of people, we just wanted to give you an idea of what type of transactions constitute self-dealing. And this is a listing of different transactions that you can have between insiders and the private foundation that could lead to a problem and could be considered self-dealing. And there's definitely exceptions to most of them, but you really have to... Anytime there's some sort of thought process of getting into one of these transactions with your private foundation, you really have to stop and consider what the rules are and what potential penalties.

So for example, the lending of money. So never can a private foundation loan money to a disqualified person. A foundation officer cannot take a loan from their own private foundation. But on the flip side of that, an exception to the self-dealing would be if a disqualified person wants to make a loan to the private foundation for no interest and for charitable purposes. So again, there are certain exceptions, but just this is a very tricky area. And a lot of times people don't even realize it. And even things as simple as paying to go to some sort of gala or golf event that's a charitable through a charitable donation can lead to problems and the appearance of self-dealing And it's just better to double check and to just give straight grants out of here and to not have any transactions that potentially benefit the disqualified person.

And just to note, that penalty is actually on the disqualified person. So a lot of people are surprised about that as well. So they'll come to us with a problem, and we'll say, "Well, the disqualified person has to pay the tax," and all of a sudden it's even worse. So it's not the charity that pays it. It's the disqualified person. So all these things are just definitely good things to keep in mind, especially as a lot of people towards the end of the year, they'll just go and say, "I want to put money into a charitable vehicle." They'll run to a lawyer, set up a private foundation, and they don't necessarily... aren't aware of all these rules. So it's definitely a good slide to keep if you're going to be doing that.

Okay. So the last type of charitable vehicle is a Donor-advised Fund. So a donor-advised fund is it belongs to the person, but it really is legally held by the sponsoring organization. So that's why you get a little bit of a better deduction. We talked about that before. donor-advised funds is more akin to a public charity when you're making a donation. But the person who puts the money in, they're going to make recommendations and they're going to make recommendations for what investments are made within the donor-advised fund and also as to what charity charities are given money from the fund.

So this is really... If you're looking to just bunch your contribution, put the money somewhere, and then slowly figure out how you want to pay it out to which specific charities, and you don't really want all the administrative issues that come along with a private foundation, this is the vehicle for you. You're going to get the better deduction and you're also going to have very, very minimal administration, very, very minimal costs. The one thing that we do say is that the donor-advised funds have been subject to IRS scrutiny for years and years already.

So we never know when something's going to come up and change something. And there are kinds of things that are under discussion and ways to sort of make the donor-advised funds a little better. But for right now, the donor-advised funds are really very, very popular and there's billions of dollars being put into donor-advised funds and there's over a million donor-advised funds out there right now. So definitely a very popular vehicle. And I could definitely understand why.

And the last slide is basically just a comparison. So we really talked about a lot of this. And this one, this just sort of sets it up so you can see the differences between private foundation and donor-advised funds because if you hit the end of the year and you want to do that bunching and you want to put a big amount into a charitable vehicle, these should be your consideration. So again, cost to set up and to maintain the legal fees involved with the private foundation, you have to set up the corporation or the trust, you have to draft bylaws, apply for exempt status, and then you also have your annual fees for getting that Form 990-PF done. Whereas a donor-advised fund, it's really very minimal.

And then a big thing that a lot of people really just don't focus on is just the administrative responsibilities. And when you have a private foundation, there's governance that's required and you're supposed to have regular board meetings and oversight of the foundation's activities/ and you're not going to have that with a donor-advised fund. So people who really don't really feel committed to the idea of having a family foundation, which is great to set up a charitable giving for your family and it gets passed along from generation to generation, but if you're not up for this kind of work involved, then definitely the donor-advised fund is a better way to go.

So again, we talked about the fact that there's required distributions for private foundations. Donor-advised funds, while the sponsoring organizations have their own reporting requirements of how much they give away in a year, no specific fund has a specific required distribution generally. So you're not going to have that over there. Something that seems to be very important to some people is anonymity. So they want to give to charity and they don't want people to know. So when you give through your private foundation, there's reporting requirements to the IRS on a Schedule B of the Form 990-PF. And for a private foundation, it's actually even public disclosure, so you can't really be anonymous. But for donor-advised fund you can. The excise tax we spoke about, the investment options.

There's a lot more flexibility when you have a private foundation. There's definitely rules that have to be followed. But for DAF, usually what we see is that they have a limited set of specific funds that are your investment options. And then control. Control is a big one. So this is where it sort of takes the turn towards the private foundation. And a lot of people, they want to control the investments, they want to control where the grants are going. And with a DAF, you're really... You can make recommendations, and of course the majority of the time they're going to follow your recommendations, but you still have lost a little bit of that control. And I think the deductibility we absolutely don't have to talk about because, between Patty and me, we probably said it a good few times. So that's it for this section on charitable giving.

I'm not sure if we have any more time for questions or if there's any questions that Patty or Lisa saw that they would like to answer?

Patricia Kiziuk: Thanks, Cindy. Lisa, did you want to go through those two or three questions and then I can go through some of the ones that I've seen? I know we only have maybe about two minutes to go over some of these.

Lisa Herzer: Sure. I know that one of the questions was relating to the taxability of the distribution from the charitable remainder trust, and yes, that is taxable. The type of income and how much is calculated on the split-interest trust tax return of Form 5227, which will let the beneficiary know how much and what type of income gets taxed there.

Another question that was there related to whether a trust can set up an online account. And it's only for individuals. A trust can not set up the same type of online account with the IRS that individuals are able to.

Another question related to an estate tax return that was filed and whether going online would put up a red flag. Since the IRS no longer automatically sends out closing letters, I think typically what people have been doing is going online to check. So I would not think, I can't say that with certainty, but I don't believe that just going online to check the account will put up any type of red flag. So that's all I had there, Patty. Anything that I did miss related to my presentation, we will answer afterwards.

Patricia Kiziuk: Correct. Yeah, and I will do the same. I just wanted to cover a few of them that I thought were interesting. One was about wash sales. There was a few questions about the wash sales. So cryptocurrency. So right now cryptocurrency is considered property not a security, so it's not subject to the wash sale rules. So that's right now. That could all change in the future. You know? This is definitely a hot area and it's gained a lot of focus by the IRS. I mean, many of you probably have noticed that the IRS includes... There is a question right at the top of the return that asks about cryptocurrency. So that's one item.

And then someone did ask about if treasuries are subject to the wash sale rules. And treasury bonds. There's actually a rev ruling about this. Treasury bonds are not subject to the wash sale rules because they're not considered substantially identical. So definitely these are really good questions that you really want to look at. We talk about these things in general, but you have to really get into the specifics. So I thought that those were pretty interesting questions. And I'll just kind of do two more, and then we'll kind of wrap it up.

Someone asked about refunds of the pass-through entity tax and whether or not the IRS has issued any guidance on that. I personally haven't seen any guidance on it, but I guess the concept there is that if you're taking a deduction for something that you're later getting refunded back to you, kind of in general the tax benefit rule should apply. Whereas that it should in essence be taxable, if you're getting the refunds and you took a deduction for it in year one, you're going to get refund in year two, well, you should then be... That should definitely be reported as taxable income.

But there isn't actually specific guidance on it. And I guess because the pass-through entity taxes are so new, all of these things haven't really caught up yet. And so I think 2022 is going to be an interesting year with pass-through entity tax because you've got taxes that have paid for 2021 and as well. So that's a little bit interesting.

And there was a few questions about Roth IRAs and things, like what's the benefits of a Roth versus a savings account. And with like a Roth IRA, if you're contributing after tax dollars income that's already been taxed into a Roth IRA, when you go to take the money out years later the distribution is tax-free. So all the earnings over the period of time is not subject to tax. And also with a Roth, you're not subject to the RMD rules. So there's lots of benefits of that.

I know we focused on the back door Roth, and someone asked, "Is that going to go away?" And just with anything in tax, they talk about it, but right now it applies. So I personally do the backdoor Roth myself each year because it's a good way to save money. So these things are also kind of investment decisions, but you have to look at what's right for you and what makes sense based upon your income and circumstances.

So with that, because we're now five minutes over the time, we want to thank you for joining us today. I know there was a lot of information there. Hopefully the slides provide a lot more details. And since we do have your specific questions, we'll go through them and reach out to make sure that we can get those answered as soon as possible.

Lisa Herzer: Thank you.

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