More On Tax Planningfrom The Advisor's Professional Library
- Annuities: Variable Annuities Annuities are hot. The tax rules vary with the circumstances. Advisors must be aware of these intricacies when discussing annuities with clients.
- Annuities: Estate Tax The value of certain types of annuities may be included in an estate’s value. Understanding the intricacies of these inclusions is a critically important aspect of estate planning.
“We all believe something big could be coming down the pike in terms of change for 2013,” Colpitts, executive vice president and co-founder of Signature, a multi-family office and wealth management firm in Norfolk, Va., said in a recent telephone interview for AdvisorOne’s Special Report, 22 Days of Tax Planning Advice for 2012.
“Some of the discussion involves itemized deduction changes, limiting charitable deductions to 28% deductibility, getting rid of other deductions. All bets are off in terms of what kinds of deals might be struck in this volatile political environment,” she said.
Still, her philanthropically minded clients need advice this year. Colpitts discussed some options available to them:
• “One of the old stalwarts, giving appreciated securities, still makes sense,” she said. A taxpayer can give the stock away to a nonprofit organization and avoid paying the capital gain on the stock; and since the charities are not taxable, they don’t have to pay the tax. “So, tried and true, we’ve been doing it for decades and it still works,” she said.
• Colpitts said that for a client whose effective tax rate has been 35%, it’s possible that in 2013 that tax benefit will be limited to 28%. “As we get to the end of the year and if it still looks like the winds are blowing in that direction, we might accelerate the charitable donation to 2012 in an environment where we still know what’s going on,” she said.
• An uneven tax year can be a good time to accelerate giving, Colpitts said. If a client’s adjusted gross income in 2012 spikes because of an IPO or some other event, and especially if there is enhanced liquidity, this year would be a good time to write a bigger check to a favorite charity or find some other tax-advantaged way to make a bigger contribution.
The alternative, if a client is new to philanthropy or doesn’t know which organizations to contribute to, is a donor-advised fund, which would allow time to figure out where to put donations.
Colpitts stressed that good planning is critical for anyone thinking about significantly increasing charitable giving in a spike year. This needs to take place in the context of an overall financial and strategic plan.
“It’s a matter of running the numbers,” she said. “What’s the after-tax inflow going to be? Do you want to change your lifestyle because of this inflow? Do you want to do anything more for your children?”
• The needs of the recipient charities should be balanced against these considerations. “Most donors think in terms of a calendar year, while most tax exempts focus on a June 30 fiscal year,” Colpitts said. “Allow yourself flexibility to time contributions.”
Consider a client who makes a contribution to a charity between now and June 30. That reaches the nonprofit in the June 30, 2012 fiscal year. If toward year end it appears that charitable contributions are going to be limited in 2013, Colpitts said she might recommend that the client double up this year. For the nonprofit, the additional donation would be credited in the next fiscal year.
Colpitts said that many of her clients time their charitable contributions according to the calendar of the charity, not their own calendar. DAFs and private foundations can facilitate this flexibility.
“If I’ve been thoughtful about it,” she said, “I can then give the money to charity in a time frame that’s going to have the most impact, that’s going to be most beneficial to the charity or as it relates to what I’ve trying to accomplish in concert with the charity.”
See AdvisorOne’s Special Report, 22 Days of Tax Planning Advice for 2012, throughout the month of March.