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

I think we can start off by saying that 2021 has been quite a year. I know everyone had really high hopes for it and I do think it was better than 2020 given COVID. And I know COVID is still happening. We're still dealing with the ramifications of COVID-19, although it is I think and hope for many of you better than 2020. We still have the civil matters that are going on. This is President Biden's first year in office and now more currently, we're dealing with inflation. This has been in the papers kind of all over. We kind of started off, we started hearing about it earlier in the year and now I think it's really in the forefront and now it's actually happening. The impact is, there's some market volatility. Again, I think there was more market volatility in 2020. The market is quite up now but still there are some things happening there. There's rising unemployment, there's food insecurity, families are impacted many personally. And it's not on here but what we've also been seeing are that supply chains have been delayed, which is going to impact, especially this holiday season.

The year-end planning, amidst these circumstances, the three major acts come into play. Again we discussed this last year, which is the TCGA Act of 2017. That was a big one. The SECURE Act and the CARES act. And they all affect each other, one gets layered onto one, one after the other. They all are still pertinent today. And then the things we have to consider are the Build Better Act, which is in progress. We have the proposal, it's just not signed in as of yet, and we'll discuss this at the end of my presentation. I'll just kind of highlight some of the changes that are out there. Of course, when we put this presentation together, I knew a lot less then. This is just a constant changing environment. And as soon as this presentation is done, I'm sure we will know more. And right after Thanksgiving, I think things are really going to get rolling.

Today we're going to talk about income tax planning for individuals, which is what I'm going to cover, estate and gift tax considerations, which is what Lisa will cover and Cindy will cover the philanthropic planning opportunities and the conclusion will try to address as many questions in the Q and A as possible.

That being said, individual income tax planning, what changed from 2020? And where might we be going for 2022? Again, I stress, there's a lot of changes, a lot is staying the same and then there's a lot kind of up in the air. And I think it does make it somewhat complex to do planning when it's like this. But the topics that I've chosen in this section are topics that I've been dealing with the most. Right after our October 15th deadline ended, sure enough, lots of clients started calling me and they were very eager to get going on tax planning. And these areas that I'm going to cover are the most popular, which include required minimum distributions and charity and proposed tax laws changes.

The first is required minimum distributions. This is a biggie because while they were suspended for 2020, you were not required to take a distribution, we cannot forget that is not the case for 2021. Do not forget to take your required minimum distribution, incredibly important. It must be taken by December 31st. You have to take it. And the requirement you have to remember also that if you're at age 72, it's required, it is no longer 70 and a half. That changed during 2020 but what also changed during 2020 is that you weren't required to take the distribution.

Also, one thing to consider is if you had less income in 2020 because you didn't take your required minimum distribution, then you might expect a larger tax bill come this April with the distribution that you have to take for this year. I would just again, be made aware of that. You might have a large balance due. You might want to take some withholding out to cover that tax. And also another option is if you don't want to pay tax on it at all, is you may be able to forego up to a $100,000 of it by giving it directly to a qualified charity.

Please note, you have to give it to a charity directly. You cannot take the funds out and give it to charity. You could but then you would still be having to report that income and then you'd have to take the charity as a tax deduction if that was what you were going to do and it cannot be given to a donor advised fund and you cannot give it to your private foundation. It really does need to go directly to a qualifying charity. And I stress it has to be done by 12/31/20 in order to count.

Let's see, next slide. Let's talk more about that. Let's talk about the qualified charitable distribution. What is that? Again, like I said, you really need to give it directly to a charity, which includes a 501(c)(3). The limit is a $100,000. If you give any more than that, that's fine. However, the distribution coming out of your IRA will be taxable and that excess portion, then you will have to take as an itemized deduction. Let's see here. Please note that this distribution, once you give it to charity directly, it is not included in your income at all, which is great depending again on your tax situation because it lowers your adjusted gross income. But you have to keep that in mind because if you have a qualified business deduction, that will affect the amount that you're able to take because now you're reducing your AGI.

On the flip side, if you're unfortunate enough to have large medical expenses that are deductible, you might want to make the charity contribution from your IRA to reduce your AGI. Now you have a smaller AGI limit, then you have a greater chance of being able to deduct some of your medical expenses. These are the things that you have to consider. What else do you have going on?

Also, if you're married and you and your spouse are the age of 72 and older, you can each give up to a $100,000 out of your own IRAs to give to charity, to go against your required minimum distribution. You don't have to give exactly a $100,000, it could be whatever your RMD is, if it's less than a $100,000 and you don't have to do it all in one shot. If you think you want to do a piece now and then see how you feel about it in December, you can wait until December. It doesn't have to be a one shot deal. But you also want to consider this too, with your charity planning.

I'm going to talk about this in a little bit in conjunction with itemized deductions, our bunching planning opportunity because if you're going to give this much to charity now, are you going to want to give this much later? And how are you planning with your itemized deductions later? Also, if you give a qualified charitable distribution out of your RMD, yes, you're lowering your income, you're lowering your income right off the bat but don't forget you can't take that as a deduction because that is considered double dipping.

Next, we have the rules regarding loans and early distributions. I put this in here because it's really important. I actually did see this several times last year. I dealt with this with several clients who took loans for the early distributions from their IRAs. They're under the age of 72 and they were adversely affected by COVID, which was a big factor in 2020. But I put this in here because well, we are on the East Coast and I know other states outside of the East Coast were affected by Hurricane Ida. But this might come into play with Hurricane Ida. We've had a lot of people negatively affected and that need cash and this will, you can take this early distribution or a loan to help you get through this time.

Also, the COVID-19 rules, they are no longer applying for 2021. Unfortunately, if you were affected by COVID in 2021, the rules do not apply for this year. But how this works is, is that you can take a distribution, take an early distribution and report it as taxable income over three years. That's kind of an automatic. You have to elect, make an election to just pay it back all at once if that's your plan. I'm sorry to take it as a taxable distribution all at once. That's something again you want to consider, what else do you have going on? What does your taxable income look like over the next year or two? You might want to pay tax all in one year or you might want to defer it. Again, dependent upon your income and deductions in future years.

But I really want to just cover that and also to be on the lookout, if you do need to utilize this, it is form 8915 and I put dash F because the form is not out yet. It appears that the IRS issues this and they'll probably be issuing the form and releasing it in February or March. That's how it's been historically and every year they changed the letter to the form.

More on disasters. I'm not trying to be Negative Nancy here but I do want to highlight that because Hurricane Ida affected so many tax preparers and a lot in the Northeast, we saw a lot here. I got a lot of call from clients regarding the casualty loss and such. The IRS and New Jersey and New York have provided extensions to January 3rd to get tax returns filed, anything that would've been due at that time and including the October 15th deadline. You have until January 3rd to file your returns. But also please note if you're making use of this extension, the IRS as closed the individual tax filings for e-filing so whatever returns you are going to file for these extended deadlines, the client will have to paper file them.

Oh, we're on our polling question.

Bella Brickle:Poll #1

Jennifer Shenise:Okay. Well, it was C, Minnesota. That wouldn't have been my guess either. Just trying to get everyone in this spirit of Thanksgiving here. Shake things up. Take a break from this tax chat. All right. Let's move on. Let's continue.

Let's take a step back to the CARES Act. I wanted to talk about people who itemize their deductions. Under current law and I'm going to say, I know that the current proposal is a lot of people are talking and it's looking like they're possibly going to lift the state and local tax deduction, otherwise known as the SALT deduction. It's not official yet but at this time, all we can really advise on is itemized deductions at this point is charity. Lots of times, I know folks they want to see how they can reduce their tax bill and my go to is always charity because that is the one thing that we do have control over. And it is the easiest deduction to take. And with that being said, the CARES Act even provided additional initiative.

Typically cash donations made to public charities was 50% or up to 60% from the TCGA Act. But the CARES Act bumped it up to a 100%. This is something that we need to keep in mind. They did it for 2020 and they're doing it for 2021 as well. But you need to remember that donations of long-term appreciated stock to public charities is still 30%, nothing about that changed. None of these acts changed that. It is still the same as it was before 2017. And just note that if you're giving appreciated stock to a private foundation, the limitation is 20% of your AGI. And that anything that's disallowed can be carried forward for up to five years. With that, we can do a lot of planning with that.

Like I said, the CARES Act has bumped up the AGI limitation to a 100% for 2021. This is really big. That also, and the ordering rules, you can use your 30% limitation first, if you had stock that you just kind of want to load, you've had it for a really long time. You have no idea what the basis is or you know the basis is very low. If you can gift it to charity and you can get the deduction and you don't have to sell it and realize the gain on it. Or so you can use that first and then any extra you can give to your donor advised fund, which is subject to a 60% limitation or just give outright to a 501(c)(3) for a 100% limitation.

This is a really great planning opportunity. I think between giving stock with a 30% limit, giving to a donor advised fund, which is a 60% limit and then giving cash to just outright to charity is a 100% limit. It all sounds very well and good if you want to just wipe out your tax liability altogether and just give all your income away and have no taxes for the year. That does sound great and I know the charities would really love that but you would also have to be foregoing a lot of cash all at once. Also, there's those lower tax rates, to each his own, but they're not the worst to be in. What you might want to do is, is consider spreading it out or maybe just contributing to your donor advised fund and if you want to just bump it up a little bit more, so maybe you're wiping out 80% of your AGI, then give that piece outright to charity.

Again, this is an area where there's lots of planning opportunities. That coupled with your required minimum distribution, there's a lot that you can do and it's worth doing a year-end tax projection, just to run a few different scenarios, especially if you have something in mind for what you might want to give next year. Again, you don't want to just give everything away now and then where does that leave you next year? Would you rather be in the 22% bracket now, give enough away to get it down and then see where you're at next year? Again, like I said, you have to do some planning.

There's all these different limitations, I just kind of want to read this example through with you because I think it's just really important because there's so many we can give, like I said, most popular is cash and stock we can give away. But depending on who you're giving it to and how affects your AGI limit. For this first example, in 2021, Jackie expects her AGI to be one million. She has made a donation of appreciated long-term securities to her family private foundation of 300,000. That's really great. That's great. She may be expecting to get this huge deduction for what she's done but what is the maximum amount of cash contributions that she can make to public charities in order to get the maximum deduction?

Well, the answer is, is the $300,000 of securities to a private foundation is not a qualified contribution so she's limited to 20% of her AGI. That 300,000 she's giving away, she can only take in 2021, she can only take a $200,000 deduction. The remaining will be carried over to 2022. No worries. It will be used. Jackie can then make qualified contributions of up to $800,000 in 2021 in order to make her total tax year charitable contribution one million, if she wanted to wipe out her entire tax liability. You have to just keep in mind the stock limitations, understand which limit you're subject to and that's dependent upon who you're giving the stock to.

Another example, and this is something that we do a lot also, and you'll hear it, you could probably Google it is bunching. When you bunch up all of your charity, because don't forget due to the TGCA Act, we have a much higher standard deduction. And some of us who rather say, maybe we're not quite high net worth, we're kind of in the middle, maybe more of the, I feel like this is a little bit more of a middle class strategy but since they bumped up the standard deduction, it's a lot higher than it used to be. Think if you're already at $10,000 with your SALT deduction and then if you have mortgage interest, let's just say that's $15,000 and you're married, that really puts you right at where the standard deduction ends. You're kind of at a point where you can give to charity or do nothing and sit right there and pretty much get the standard deduction. However, if you have a lot to give the charity, you might want to bunch it up. Instead of giving a 1,000 or a couple thousand dollars a year to a charity or 10,000. Once you bunch it up. Find a year that you'd want to do that, and you could get greater tax benefit by doing that. So in this instance, a married couple, they have the $10,000 of real estate taxes and they want to make charitable contributions of $30,000 a year. That sounds great. But, over a five year period, charitable contributions would be $150,000 and the deductible real estate taxes are 50,000. Combining to equal the totalized, itemized deductions of $200,000. But if you put them, bunching all the $150,000 of the charity into one indeed first year. It will result in a total itemized deductions over a five year period of $263,000. That's a pretty substantial amount. So $160,000 in year one and then you could hit the standard deduction of $25,900 per year and years two through five. Of course, that numbers indexed for inflation, sure would be a little bit greater than that.

Implementing this bunching strategy, preferably using a donor advised fund will yield a federal after tax benefit of up to $23,500 over five years. Which is $63,000 of additional deductions at a top rate of 37%. This bunching strategy is applicable to all charitable contributions, thresholds, assuming that only itemized deductions are taxes and charitable contributions. Of course you can always throw, if you have a mortgage interest or investment interest expense, that would just, that would obviously increase your deduction. In effect, the myriad taxpayers with only taxes and charitable contributions, the strategy can yield about just under $16,000 of additional deductions for every year applied. I have a little chart here, just if you want to review it. If you're like me and you want to just look at a chart so you it's easier just to see the numbers in the end. Here it is.

So next I want to talk about retirement plans. I'm only going to talk about the backdoor Roth IRA. I know it's a very hot topic, especially now with the possible tax law changes, so it's the only one I'm going to discuss. So, the backdoor Roth contribution. This is something that I see a lot of clients take advantage of because the income threshold for putting money into a Roth IRA is so low. I think it's about $140,000. If you make more than $140,000, or you have that much in AGI in a year, you're not allowed to make a Roth contribution. What you could do is, just open a traditional IRA, non-deductible IRA. Contribute the maximum amount, which is $6,000 or $7,000, if you're age 50 and older, and you have at least that much money of earned income. Such as, you have a business or you have a W-2, you can contribute that. Open up a -- put that in your non-deductible, traditional IRA. Wait two days and you can roll it over into a Roth and boom, now you have money in a Roth IRA.

The reason for that is, if you don't wait long, just a few days, then the money will have not earned any interest. Will have not grown at all, because once you do a conversion, then whatever you convert is taxable. I'm sorry, the earnings on what you've converted is taxable, unless you've deducted the $6,000 or $7,000. So now you have funds in a, Roth IRA. If you already have a large traditional IRA and it's been sitting there for a long time and you're like, you know what? I really would like to just convert this to a Roth. I think tax for rates are going up in the future. I want to let the Roth IRA grow tax free, which is the beauty of the Roth, right? Traditional IRAs, tax deferred and Roth IRA is tax free.

So let's get that money into a Roth. Then you can do the conversion, but know that you're going to have to pay the tax on the increase in value and any deductions that you've taken on the IRA. Pretty much the whole, I'd say generally speaking, it's almost the whole thing you'd have to pay tax on, in the current year of conversion. That is a huge tax bill, for one to bite. Again, this is why charitable planning might be a good time to have that come into play. Also, if you have a large charitable intent. So, this is one other planning opportunity and one that you might want to con -- If you're even thinking about doing it. Think about it a little bit more before the end of the year, because the Build Better Act has some limitations in there. AGI limitations. They're going to, the back door Roth is really a loophole and that's something that, the government recognizes this and they're looking to close that.

The plan is now, I think, if it's married, filing joint it's about $400,000 or $450,000. You won't be able to do a Roth conversion 2022, if this bill passes. I would strongly suggest if you're considering doing it. Think about it long, more so, and then speak to your tax advisor and see if it makes sense. Also, if you have low income this year, it might be worth doing so you can pay a lower rate of tax on it.

Bella Brickle:Poll #2

Jennifer Shenise:True. Yes. For some, it still is a three day affair. Carry on. Okay. And this is the, what I had mentioned when I signed on to here, I said, there's going to be some tax laws that maybe we forgot. Yes, indeed. Section 461(l), the Loss Limitation. Which actually looks like there's an exclamation mark in there. Which, that's probably how many of you feel about it, but that is an error. So, what is this? This is the disallowance of excess business losses from 2018 to 2015. But thanks to the CARES Act, in 2018 after we filed all of our tax return, some of which were subject to this limitation, the CARES act said, you know what? Let's just suspend this. We'll just kind of pick this back up in 2021. So, it is it's happening in 2021. I don't know how many of you remember it back in 2018, I think we're ready to put a lot of those changes behind us, but this one's coming back.

Basically what this does, it's limiting your losses. It's limiting someone who's married, filing joint, anything in excess of $524,000 of business losses are limited. It's just is going to carry over as an NOL to the next year. We have to keep this in mind. I think some people may have been maybe anticipating higher tax rates and to, maybe you want to push your losses off into later years. I think you really have to just do some planning because this is going to be the maximum that you're allowed to take.

Also, I want to say that. In 2018, if you did file a tax return and you were subject to this loss, my question to you is, did you file an amended return to remove this loss limitation and get your refund? If you haven't, you should do that soon before the statute closes. But this loss limit -- Oh, just also, this Loss Limitation is applied after the at-risk limits and the passive activity rules have been applied. So once the return is pretty much done, it runs through this final ringer of the 461(l) loss.

And I have on here, what is business income anyway? I think that this law, it came out quickly, again, we're trying to figure out and understand all these crazy tax laws that are coming at us, but really what is this? Business income does not include W-2 wages. It does include items that you report on schedule C schedule F, some activities that are on schedule E. These would be business items, which typically come from, if you receive a K-1, items on boxes one through three or 10. Also, you'd have to read the footnotes to determine if there's business income in there and also business gains and losses that you might report on schedule D and on form 4797. These are all business income items. This is a whole separate calculation you're going to have to do.

I know, I recall seeing that in 2018, people weren't quite sure what was going on with this and what exactly business income is. But like I said, on the previous slide, I mean, at least that's your guide to what you can start with. Also, there's a SyCom to compute this. You're going to see form 461. It starts with all of your income and then pulls all the non-business stuff out. In order, you want to make sure that your tax software is computing this correctly. Rather you're a tax preparer, or you're preparing your own taxes. You're trying to understand this, or what might be coming or what might be limited. You're going to want to do a separate spreadsheet for this to see, to calculate how this has arrived at.

And then you're all like, I have a note down here. Obviously you're going to want to plan a little bit since you're limited to the amount that you can take. So you're going to want to accelerate business income into share, to avoid NOL limitations. Again, depending on the State, you might have other State implications that don't allow you to take a loss in that area at all. So, you want to look at the state implications when determining this amount. Then last but not least, I wanted to just, I know this chart actually like comes through somewhat small, but at the time of preparing these slides. These are the proposed Biden Tax Law changes that we have seen. I don't think they're in there now, but I think that for a while, they were talking about bumping up the ordinary tax rates, to 39.6%.

I don't believe that's in there anymore, but just remember that currently the top rate is 37%. It's looking like Capital Gains rates are not going to change. I know a lot of people were worried that they were. One area that we do think may change is the qualified small business stock. That it's probably going to revert to several years ago and they're going to disallow the 75% and 100% gain exclusion. This would be for taxpayers with AGI and excess to $400,000. Currently there's 75% and 100% gain exclusion and this is the one area that is retroactive. So, unless there's some type of binding contract in place, for the most part, there's really not much you can do about this. This is a retroactive to September 13th of 21. The net investment tax, they're expanding that to include business income.

So it looks like there's going to just be a lot more income that's subject to this 3.8% tax, that's possible. There's also the surtax, equal to 5% of those married filing joints and excess of a million dollars. For the ultra-high net worth folks, the tax bill could get quite pricey with the percent and 3% surtaxes. Also the Roth conversions may be disallowed for those after 2021, with those, with income greater than $450,000.

The biggie, which I think everyone all over the place is really kind of salivating over is the SALT deduction. It will pay possibly be lifted or, increased above the $10,000. Right now there's talks of it being increased to $80,000. That really does affect, I know a lot of people say it just affects the wealthy, but it does affect the middle class as well. So I think this is a really big deduction, and this is one to watch. Again, these are all things that we're going to need to keep our eyes on. We should really be running some tax projections. Given the charity, possible Roth conversions and these new tax law changes. I think it gives all of us a lot to chew on by December 31st. With that, I will hand it over to Lisa Herzer.

Lisa Herzer:Thank you, Jen. Hello everyone. I'm Lisa Herzer. I am a director in the Tax Department and I will be discussing year end estate and gift tax considerations. When all the tax proposals came out this past spring and summer, the most drastic seemed to be in the Estate, trust and Gift tax area. There was discussion of eliminating grantor trust favorable tax treatment, Reducing the basic exclusion amount, Stepped up basis changes and more. Estate planners went into high gear and therefore lots of gifting has already been done in 2021. Fast forward to Friday when the House passed The Build Back Better Bill. God forbid that Congress pass a bill without alliteration. The bill now moves to the Senate where changes are expected.

But, as of right now, the bill does not contain any of those drastic changes that we worried about in the estate gift and trust area, and that were discussed. The bill does, however, expand the net investment income tax as Jen discussed and imposes a 5% surtax on modified adjusted gross income for trusts greater than $200,000. So these limits are much lower where these taxes start to be imposed than on the individuals. An additional 3% tax for modified adjusted gross income in excess of $500,000. So a lot of trusts that we work on, I know will be affected by these changes if they remain as they are now. For now estate and gift tax planning remains the same as it has been in recent years. We will discuss some of those planning techniques. First let's review the basic exclusion and exemption amounts.

Here are the amounts for 2021 and the 2022 amounts with the inflation adjustments. The annual gift tax exclusion, which is currently $15,000 per individual or $30,000 for a married couple will increase to $16,000 for an individual and $32,000 for a married couple for 2022. Earlier in the year, there was discussion of limiting this per donor, as opposed to per donee as is currently, however, that is not in the current bill. Just an example, an individual has six children and someone else that has two children, the person with two children would be able to give the same amount to each of their children with no effect. Where, the person with six would have to divide it up into lesser amounts. So, that was a good thing that that is not in the current bill.

The annual gift tax exclusion for gifts to non-US citizen spouse is $159,000 in 2021. That will increase to $164,000 in 2022. The gift and estate basic exclusion amount of $11.7 million in 2021 will increase to $12.06 million in 2022. Don't forget to gift this additional $360,000 per person come January. Of course the GST exemption moves the same as the gift and estate tax amount.

The doubled basic exclusion amount is set to automatically decrease n 2026. I just read this morning that since the change in 2017, that doubled the exemption amount. Estate tax collection decreased by $10 billion in 2019 alone. This is an easy revenue raiser. I feel. As it only affects a few thousand taxpayers.

I believe I read this morning that the amount of estate tax returns that were filed, it was 1,254, around there. That's not exact. As you could see, this an easy one for them to put back in. Again, $10 billion with what they're looking to spend isn't that much, but it is an easy one to put back. This could be changed, but we'll have to see. It's important to note that you must use the entire $10 million plus BEA to capture the increase because the bonus exclusion is deemed to be used last. So for example, if you gave away $6 million in 2021, and if the bill does have it revert back for the end of 2021, you will have no exclusion left. However, for portability, the basic exclusion of the pre-deceased spouse does not shrink to the lower amount. Once it is set to, sunset in 2025.

So some planning ideas to utilize this doubled basic exclusion amount before, or it goes away, whenever that will be. Forgive any outstanding family loans. Many family loans aren't expected to be paid back. So why not forgive them now and use some of that extra exclusion amount that you have. If there was a previous sale to its defective grantor trust consider forgiving the loan. Pre-funding life insurance trusts. When everyone was scrambling over the summer over the grant, or trust changes. Many were considering to fully fund life insurance trusts with enough to pay the premiums in the future so that those grants or trusts would still be grandfathered if those changes had made. This is something else that could be done to utilize some of that increased basic exemption amount. Excuse me.

SLATs. Spousal Lifetime Access Trusts. There have been many SLATs set up recently in anticipation of the reduced basic exclusion amount. Especially for those who are concerned with gifting away, the full exclusion amounts. So one spouse or both spouses set up trusts for the other, and then eventually the children and grandchildren will receive the trust. This permits the spouse to give away property, but retain indirect access through the other spouse. So for those that are concerned that they're giving away too much, this at least allows the other spouse to have access. It should be noted though, if a couple sets up a trust for each other, then the trust must be different so that the reciprocal trust doctrine does not apply.

What if both spouses don't have enough assets to set up a trust for each other. So in other words, one spouse has most of the assets in their name. Well, the wealthier spouse can give property to the other spouse. However, then the trustshouldn't be set up right away. So that there's a cooling off period. So that the IRS doesn't say put the step transaction doctrine in and then you wouldn't be able to utilize the SLAT. Another point to consider is that SLATs are generally grantor trusts. The donor spouse, rather than the trust will pay the trust income tax, which is a good thing because that's an additional tax free gift.

Another strategy to utilize at least some of the increased basic exclusion amount If a couple is not comfortable as I said before, giving away their full $23.4 million, but wants to take advantage of the larger BEA. One spouse should give $11.7 million to the SLAT and the other spouse should not use any of their BEA. Then if the BEA reverts to five plus, whatever it will be, because it will still be indexed for inflation. The donor won't have any exclusion remaining, but the other spouse will still have their entire basic exclusion amount remaining. The couple will have succeeded in at least using half of that bonus amount.

So while interest rates may have increased slightly, they are still historically low. So, the November 2021 rates the short term, midterm, and long term rates I have here and the 7520 rate, which is used for GRATs and other areas is 1.4% which again is very low and a very low hurdle to have to jump. So I guess we really need to plan now rather than later, as I said earlier, it would be easy for them to put this lowered exclusion amount back in to this bill send it. However, it's supposed to sunset at 2025.

So those that are able to utilize the higher exclusion amount should. Another planning idea also about using it now rather than later, is transfer that asset before it substantially appreciates. So this way the appreciation is out of the estate. The other consideration is the consider the loss of basis step up when gifting assets and I think this is going to become more and more important with increased income tax rates. And then also you have to think about the state tax rates.

So you're going to have to balance the loss of step up with the gifting of the asset and removing it from the estate and trying to reduce the estate tax that is being paid.

Bella Brickle:Poll #3

Lisa Herzer:Great. Most of you got it right, 2026. As of right now, it's set to revert back to the $5 plus million. So, setting up shelf GRATs is something else being discussed this year when GRATs changes were anticipated. They are funded with cash and then later on could be used to swap with other assets. Sometimes there's a series of them but this was also one of the techniques that was discussed especially in the summer with the fear that grantor trusts were going to not be around much longer.

So, Up-Generation Gifting is another valuable planning tool where there is significant family wealth that is earned at the current generation. So if the current generation holds the wealth that it's not wealth that has been passed down, a lot of times, the grandparents will not have enough wealth to utilize their full exemption amount, even at the lower rates, if they do go down. So the thought here is that you would be able to gift and shift some of the asset value away from the current generation up and this way any appreciation will occur at that up generation level.

And then, when they do pass, they will be able to pass it down to the grandchildren and that appreciation will come out of their estate as opposed to the current generations' estate. There are different ways to do this and that's part of the planning but you could use short term pop loans, you could use a zeroed out GRATs. So you note the current generation hasn't utilized any of their current exemption but then the grandparent is the beneficiary. And again, it's about the appreciation.

So, what's to come? So we prepared these slides I think as Jen said earlier, a few weeks ago, and I specifically left this as a blank slide, anticipating that will there be a vote as occurred on Friday, or will they not, will something be passed? I don't have the crystal ball, I don't think anybody here has the crystal ball. We know that with the current administration rates will most likely not be going down. So it remains to be seen what's going to happen in the future.

The other point I wanted to make was regarding state taxes and in the estate area. Currently there are 12 states plus the District of Columbia that have an estate tax and there are six states that have an inheritance tax. So we always need to keep that in mind when we're doing our planning as well as on the federals side. So, I think we have last polling question coming up. Yes.

Bella Brickle: Poll #4

Lisa Herzer:A lot of New Yorkers in the audience and New Jerseyans and so that is the correct answer, George Steinbrenner died in 2010, so there was no federal estate tax on his over a billion-dollar estate. I put the other ones in because there were some estate issues with Prince's estate and Michael Jackson's and Neil Armstrong died in 2009. So great. I will pass it over to Cindy for the philanthropic planning opportunities.

Cindy Feder:Thank you, Lisa. I'm going to be discussing some charitable giving, a topic that's on everyone's mind especially now as we all continue to face the challenges of a global pandemic. Despite times being difficult for everyone, there really have been historic levels of generosity as a response to the increased need. According to Giving USA Foundation's annual report for 2020, charitable giving in the US, reached a record of 471.44 billion as individuals, corporations and foundations made contributions in response to the pandemic, as well as racial justice issues.

While a big part of the giving relates to people wanting to help one another, as always there is a relationship between philanthropic giving and the income tax deduction we can receive. So, planning for your philanthropic giving should be incorporated with your income tax planning, which is something that Jennifer discussed before.

The tax cuts in JOBS Act eliminated or restricted many itemized deductions in 2018 through 2025 but one deduction that did remain was the deduction for charity making it all the more important. Obviously, charitable deductions are more valuable in years than an individual has a higher income tax rate. A lot of people are doing their planning by looking at two-year income tax projections in order to time the charitable deduction for optimal benefit.

And again, Jennifer had discussed that with the increased standard deduction and with the bunching it sometimes pays for doing a bigger charity amount in one year and then taking a standard deduction in the next year. And of course, because the CARES Act and the increase in the AGI limitation on cash grants to public charities to 100%, there's been a big push for people to give to charity in those years.

There are many different charitable vehicles that people can use to put their philanthropic planning into effect and we're going to discuss a few of those later on in this section. So, the considerations that go into determining what a person's charitable deductions will be are as follows, the individual's AGI, the type of property given and lastly, the status of the exempt organization that they're making the donation to.

The chart on this slide gives a summary of the most common types of charitable organizations that a person would give to unless the AGI limitations applicable to cash gifts and gifts of appreciated property. You can say that for public charities when only cash is given in most years, the AGI limitation is 60%. But if you give appreciated capital gain property, the deduction is limited to 30% of AGI.

For private operating foundations, the same rules apply as for public charities. But for private non-operating foundations, those AGI limitations are at 30% for cash and 20% for property. Of course, as was mentioned already for 2020 and 2021 cash gifts to public charities and also private operating foundations have the increased AGI limitation of 100% due to the CARES Acts.

One thing to know which will come up again later in the slides, is that while the donor advised funds and supporting organizations generally fall into the public charity status for purposes of this increased AGI limitation, they were specifically excluded. So giving to your DAF is not going to get you that 100% AGI limitation. And the intention of the act was to get the funds directly to the organizations that are actually doing the charitable work and to avoid having it just being put somewhere and sit there just in order for someone to get a tax deduction.

So, we already said that we try to plan our charity so that we 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 as the access can be carried forward for five years. So if we read the example together, it illustrates, Grace makes a cash donation to her private foundation of $2 million and her AGI is $4 million. Her charitable deduction is 1.2 million.

Since Grace made a cash contribution to a private non-operating foundation, she can deduct up to 30% of her AGI. The excess amount of 800,000 is carried forward to the next five years. So of course, if you have your own personal reasons for giving charity in a certain year, you don't have to worry that you're going to lose it. A lot of planning over the past few years has evolved bunching of charitable contributions and making those contributions specifically to DAD's or private foundations.

So in one year an individual will get to take the itemized deduction by putting a significant amount of money into a DAF or a private foundation and then those funds can be paid out from those vehicles over a number of years, subject to the provisions of the code. And again, just to keep reminding that for purposes of this increased AGI limitation of 100%, the DAFs don't qualify for cash, they're still at 60% and 30% capital gain for capital gain property.

So, we talked about the deductibility of donating long-term appreciating property, but we didn't really get into the reasons of why someone would want to donate property and what other tax benefits they received by making these kinds of donations. So the example on this slide illustrates how in most cases in a regular year, it would be better to donate the long term appreciated property than sell it, because in addition, the charitable deduction, you're also avoiding tax on capital gain.

By looking at the example, it's clear that in this case, it's more beneficial to donate the stock to the charity rather than selling the stock first and then donating the proceeds. It's funny but for the 2020 and 2021 years and the increased AGI limitations of cash gets to 100%, there are some very specific situations where it actually may be beneficial to sell the stock and then donate the cash but this is very specific situations. In general, this planning technique of donating the appreciated stuff is what works for most people.

So, some other planning considerations is to make sure you have a real legal transfer of your charitable gift by the year end because otherwise you're not going to get to take it on your tax return. Never use securities that the fair market value is lower than the cost because you're going to be limited to your fair market value and lose the benefit of the capital loss.

So this is the exact opposite situation that we talked about donating appreciated stocks. So in this situation, you're going to end up getting the lower of the fair market value as your charitable deduction and then you won't get to take a capital loss. So this is never a good idea. If the stock is short term capital gain property, meaning that it was only held for 12 months or less, the deduction is limited to the lesser of fair market value or tax basis.

And if the property donated is inventory or subject to depreciation recapture, again, the deduction is going to be limited to the lesser of fair market value or basis.

Bella Brickle:Poll #5

Cindy Feder:Okay. So it's really funny, everyone always thinks Snoopy but when you look into it, you see that it's actually Ronald McDonald that's been in the parade the longest in the most times. So, the next couple of slides that we have go through the donation of artwork. Artwork is a common item that people like to donate to charity and we just want to clarify the differences between donating appreciated capital property and artwork which is really tangible personal property.

So the rule that applies to artwork is that if the item donated to charity is used by the charity for its exempt purpose, then the person can take a full fair market value of the donation on their tax return. So for our example, back to Grace, if Grace donates a painting to a museum, the deduction will be the fair market value of the painting because obviously, the artwork is within the museum's mission and except purpose. So she's going to get the full fair market value there.

If she donates the same painting to a social service agency, the deduction is limited to the lesser of its fair market value or its basis. And also to remember, if the charity disposes of the property within three years, the donor will be required to include as ordinary income for the year of disposition, the difference between in the charitable deduction and the donor's basis.

Sometimes when people donate artwork they contribute a fractional interest. What that is, is a gift of undivided portion to a charity that uses the property in connection with its exempt purpose. For this type of donation, the initial deduction is computed by multiplying the fair market value by the fractional interest contributed. But remember, subsequent deductions are limited to the lesser of the value at the time of the initial donation or subsequent donation.

So just to illustrate, going back to Grace, who's very charitable, she donates an interest in a painting valued at 400,000 for three months and she retains the painting for the rest of the year. Her charitable deduction is 100,000 which is 25% of the 400,000. If she decides to gift an additional three month interest in the subsequently year and the fair market value is now up to 500,000, her charitable contribution is still a 100,000 based on the lower value of when she donated the first interest.

Another thing you have to be concerned about when you're donating a fractional interest is the recapture rules. So, recapture will occur if you make an initial fractional contribution of artwork and then you fail to contribute all of your remaining interest in the artwork to the same donee on or before the earlier of the date. That's 10 years from the initial fractional contribution or the date of your death.

So recapture consists of an income inclusion in the year in which specified period falls and is in the amount that was previously deducted plus interest running from the due date of the return for the year of the deduction until it's paid and a penalty of 10% of the amount of the income inclusion. So basically, if you're not sure if you want to part with a piece of artwork, you don't want to start with giving fractional interest is because then it's going to not work out in the future.

So this next slide is just basically your checklist and summarizes some of the points we already discussed and some things that are really pretty easy to understand. It just basically, if you want to donate the artwork, you have to remember that you need an appraisal and you have to get an appraiser early because they get very busy at the end of the year and the appraisal's necessary, cannot donate the artwork and get a deduction unless you have that appraisal.

Another thing is just make sure the charity wants the artwork. Make sure they're going to hold onto the art and not sell it within the three years because you don't want to have to put it back into your income in a later year and also make sure they use it as part of their exempt purpose so that you get that full fair market value deduction and not limited to cost.

Okay, so now we're going to talk about the different charitable vehicles that you can use in order to put your charitable intentions into effect. So the first thing that we're going to talk about are certain trusts that are referred to as split interest to trusts. These trusts are partially charitable and partially have some interest retained by a non-charitable beneficiary. So the first type is a charitable remainder trust.

A charitable remainder trust is a trust that provides an income stream to the non-charitable beneficiary during the term of the trust and then the remainder is distributed to a specified charity. The income stream to the beneficiary determines what type of charitable remainder trust it is. A charitable remainder annuity trust also, I'm sure people have heard it referred to as a CRAT pays a fixed amount based on a percentage of the initial trust value.

So every year the non-charitable beneficiaries is going to be getting the same amount. They're going to be getting the same annuity every year because it's a percentage of the initial amount that was put into this trust. A Charitable Remainder Unit Trust or 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 this number is going to be constantly changing every year. As you look at the end year value and determine what is the amount that needs to be paid. So some things to remember about charitable remainder trusts is that these trusts are irrevocable. The terms of these trusts can't be more than 20 years and any annuity payout has to be at least 5%, but not more than 50%. So in the case of a CRAT, that's going to be on the initial fair market value and the end of year value for a CRUT. And lastly, something to consider is that there are gift tax consequences to setting up a charitable remainder trust with a beneficiary that's not a granter.

So this is a lot of information and it sounds very complicated, but there are definitely advantages to having this type of charitable vehicle. You get a charitable deduction for the present value of the remains or interest that goes to charity while deferring capital gain and creating an annuity stream, the assets can grow tax deferred since income tax is paid only on the annuity payments.

The other type of split interest trust is called a Charitable Lead Trust or a CLT. This is going to be the opposite of the remainder trusts, where the charity is going to be the one getting the annual annuity and the remainder interest goes to a non-charitable beneficiary. This vehicle efficiently transfers, future appreciation to someone's heirs. The present value of the remainder interest is what subject to the gift tax. So future appreciation escapes gift tax to the extent that the assets outperform the IRS 7520 rates, which were used to calculate the remainder value, more assets are able to be transferred to your heirs tax free. And as Lisa mentioned before that 7520 rate is very low.

CLTs are set up is either granter trusts or non-granter trusts. You can see the differences here at the bottom of the slide. For granter trust, the granter can take a charitable deduction at the time the CLT is established, and this is beneficial since the IRS 7520 rate has been relatively low resulting in higher charitable deduction. And in this type of trust, it's the granter that's taxed on the annual income. When a cloud is set up as a non-granter trust, there's no charitable deduction allowed at all. And the trust is taxed on the income.

This slide just gives a visual of what we were saying about the CLTs. The granter transfers assets to the trust. The charity is the one receiving the annuity. The granter is paying the tax on the income. If it's a granter trust. And at the end of the day, the remainder goes to the heirs. And if the assets have outperformed the 7520 rates, we have assets transferred to your heirs tax free.

Bella Brickle:Poll #6

Cindy Feder:Okay. So the answer is a CLAP. So a little trick is that basically whatever the charity's going to get, if they're going to get the remainder, it's a Charitable Remainder Trust. And if they're going to get the annuities, that's the lead, they're the lead. They get it every year. So the answer is the number three Charitable Lead Annuity Trust CLAT.

Okay. So the next charitable vehicle we're going to talk about is a private foundation. So anybody who's on here who knows that I could talk about private foundations for the full hour and a half. But we're going to keep it to the highlights over here, just to give a little overview about what type of entity this is. So when someone sets up a private foundation, it's, its own legal entity with its own books and records. It's not somebody's bank account. It's an actual legal entity and it's set up as a corporation or trust. And once that corporation or trust is set up, they have to apply for tax exempt status with the IRS and fill out form 1023 and wait for the IRS to give them a determination letter describing what type of charitable entity they are. They also have to register with the state Attorney General of the state that they operate in.

And also, depending on if they solicit funds, they may have to register with other states. A private foundation has annual filings. They don't have any kinds of thresholds for income or thresholds for asset levels. If there is a private foundation, it has to file every single year with the IRS. A private foundation has to distribute at least 5% of the average non charitable assets each year, otherwise it's subject to severe penalties.

So one thing that I've noticed that people have to be careful about is sometimes people like to donate something to their private foundation, that doesn't necessarily generate a cash flow. And then they have to remember that every year they're going to have to look at the fair market value of that asset and they may have to put in money so that their foundation can meet this charitable requirement to give 5% of the fair market value.

There used to be a tiered tax on private foundations where you would either be in a 1% tax or 2% tax on your net investment income. But for years, beginning, January 1st, 2020 and later the tax is a flat 1.39%. So private foundations are different than public charities. So they do have to pay this excise tax on their net investment income, which is generally dividends, interest, capital gains and they could take a deduction, any investment fees or any fees that are related to generating the investment income and this tax isn't really so big. So it's not too scary a tax.

Some of the other regulatory considerations. And these are the things that always come up. These are the things that people are always calling us about questions is that when you have a private foundation, you really have to make sure that you're doing everything properly and that there's no taxable expenditures.

Taxable expenditure is when you make an expenditure, that's not a qualifying distribution. So if you're going to give money to something that's not a 501(c)(3) public charity, there could be penalties for these expenditures, unless you follow certain procedures like expenditure responsibility and reporting to the IRS. Another thing that private foundations can't do is, make grants to individuals for travel or study without having preapproval from the IRS for their procedures to do that. So that would also be a taxable expenditure if they don't have that preapproval. And the last issue that really always comes up is self-dealing and self-dealing is an issue that when a disqualified person who basically is an insider in the foundation.

If they're getting some sort of benefit from a transaction to get with the private foundation. So there are certain transactions that are just not allowed between disqualified person and with a private foundation. And people really have to know that going into setting up their private foundation, because these penalties can't even be abated for negligence or lack of knowledge. These are big penalties and they're assessed on the disqualified person, not even on the private foundation.

So the next two slides talk about internal revenue code 4960, which was imposed by the tax cuts and job act. So what this is, is basically a 21% tax imposed on applicable tax exempt organizations or ATEOs for short, when they pay compensation in excess of a million to any of their five highest compensated employees. And the tax is also on excess parachute payments. And the area of concern with this law was that the tax didn't only apply when that ATEO itself paid compensation of over a million, but it looked at the ATEO and at its related organizations included for-profit entities. So, there was a concern that certain people, if they had private foundations, all of a sudden, their for-profit businesses would be hit with some sort of tax because of this excess compensation law.

But thankfully final regulations were issued to provide relief. And there were specific exceptions to the rule that excluded employees who didn't receive any compensation from the nonprofit, and also spent no more than a certain percentage of time working for the nonprofit. So these exceptions that are listed here just basically clarified that when there was a private foundation that had volunteer work done by related for-profit employees. As long as these exceptions were met, the 4960 tax would not apply.

The last charitable vehicle that we have to discuss is something that we've spoken about is the Donor Advised Fund. So this is definitely the one you want. If you're looking for a charitable vehicle, that's the easiest to administer. The AGI thresholds are similar to public charities. So except for that a hundred percent doesn't apply, but in a normal year, they get the same 60% for cash and 30% for the long term appreciated property that a public charity gets.

And the way it works is that donors can make recommendations as to their charitable preferences. And technically the fund is not required to follow those recommendations, but if they are to find 1(c)(3) public charities, they're generally wouldn't be an issue. And the DAS have been subject to some IRS scrutiny over the years, but so far they have continued to attract a lot of donations and contributions to DAFs in 2020 totaled 47.85 billion, which was at an all-time high and up from about 20% from 2019. So even though they didn't qualify for that a hundred percent, a lot of people were putting money into their DAFs in 2020.

And sometimes people will ask for the differences between, whether or not they should have a DAF or a private foundation. And the only thing with a DAF is, it’s much easier to administer. You don't have the same, you wouldn't be responsible for getting a return filed for your DAF, but private foundations do offer a little bit more flexibility. If you are looking to do a little more than just make grants to your 501(c)(3) public charities. But if what your goal is with your DAF is just to slowly give charitable contributions to 501(c)(3) public charities. The DAF is definitely the easiest way to go.

Okay. So I'm going to turn it back over to Jennifer. Who's going to look at some of the questions and see what we have time to talk about.

Jennifer Shenise:Hi, we have a few more minutes. So there's a lot of questions. So I'm going to start off with one. Someone had indicated that TD Ameritrade has the qualified charity as included on the 1099. Is it taken on your tax return? I take that to mean, if you give or make a qualified charitable distribution in lieu of your RMD from your IRA, yes, you will get a 1099 and it's going to report the amount that you gave to charity, but there is a code on the 1099-R and which is very important because you still need to give that to your tax advisor so they can report it on your personal income tax return. And then what will happen is it will show in the total. I think there's a total IRA box. And I think a QCD will be written next to it and then the main column of your return, which is where they report your taxable portion, it will be blank. So yes, if you make a qualified, charitable distribution from your IRA account, it will need to be reported on your tax return. Although it will be reported as non-taxable.

I have another question for the early distributions repaid over three years, which year tax rate would the repay of the tax be on? When you repay the distribution back, it's based on the tax rate in the current year that the repayment is made. So if you pay tax in a particular year, it's just going to be included. Well, actually it's not, actually, I'm sorry, early distribution is not a repay, but if you take a distribution and pick it up as taxable over the next three years, whatever the tax rates are in effect for each of those years, that the distribution pieces you're reporting, that's the rate that you'll be subject to.

Lisa Herzer: There was a question here, Jen. Yeah, there was a question here. Someone wanted to know which states had the inheritance tax. So the states with inheritance tax are Nebraska, Iowa, Kentucky, Pennsylvania, and New Jersey. And I thought, I'd also mention that those with estate tax are Washington, Oregon, Minnesota, Illinois, New York, Maine, Massachusetts, Rhode Island, Connecticut and DC and Maryland actually wins the prize, they have both estate tax and an inheritance tax. So those are the states someone had asked about.

Jennifer Shenise:Okay, I have another question. If I give stock to my private foundation and that organization sells the stock and gives to a public charity, is my deduction still limited to 20%? The answer is the yes. It's based on what you gave to the private foundation. In most instances, actually, when you give stock to foundations, often they do sell the stock shortly thereafter in order to fulfill their charitable requirements so that they're going to want the cash. So yes, you gave stock to the private foundation, no matter what they do with it, you're limited to 20%. Lisa or Cindy. Do you see any questions that you would be able to answer?

I don't want to talk over anybody. Okay. So then I, one last question here for the backdoor Roth IRA. Can you make the contribution by 4/15/22 and apply it to your 2021 tax year return? No, you may not. It has to be done by 12/31/21, or when you say it might not be an option in 2022, should there be an acceleration to do the backdoor contribution by 12/31/21? That can be a loaded question. Like I said, if you're considering doing a Roth contribution or rollover backdoor conversion, you're going to want to just explore that a little bit more. So, depending upon your set of facts, because you may not be able to do the conversion. If your income is over a certain level in the event, the build back better act comes into play. That's a possibility. So if you really don't want to miss out on the Roth conversion, you really need to consider doing that by the end of this year. Just consider it, run a projection and see if that makes sense for your particular tax scenario.

Does anyone have any other questions that they would like to review? Cause I think that takes us to the end of the presentation here. It is now 1:30. So this concludes our individuals and family tax update.

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