Time to Make End of Year Charitable Gifts

We are now in the final months of the year. It’s time to plan for year-end charitable contributions. If you can afford it, charitable contributions are a great way to combine gratitude with potential tax savings! This may be the year to be very generous.

Required Minimum Distributions (RMD) from retirement accounts were temporarily waived for 2020, but not for 2021. If you are age 72 or older as of December 31, 2021, you must take your RMD before the end of this year. But, what if you don't need the money and want to avoid the tax hit that comes with taking your RMD? A "Qualified Charitable Distribution" (QCD) may be a solution. With a QCD, you can direct funds, up to $100,000, from your retirement account to be paid directly to a qualified charity. The amount counts towards your RMD, but it is not included in your taxable income. And, the qualified charity will benefit. It's a win-win! Give yourself some lead time to direct the plan administrator to make the distribution before December 31.

The win-win of charitable gifts also applies in the face of the proposed reduction of the estate tax exemption under the "Build Back Better" Tax Act. Right now, the estate tax exemption amount is $11,700,000. If the proposed reduction passes (as of the date of writing this article, nobody knows what Congress will do), the exemption amount would drop to approximately $6,000,000 effective January 1, 2022 (four years earlier than under current law.) This has everyone talking about making gifts to get money out of their estates now, before the end of this year. But, gifting is not so simple. There are issues such as loss of control, loss of income from gifted assets, low carry-over basis, and using up precious exemptions that soon could be reduced.

Gifts to charity will not reduce your available exemption from estate tax. A low basis asset donated to charity can be sold by the charity without capital gains tax, and larger gifts can even be structured to retain an income for yourself or others for a period of years, or for life with the remainder to the charity at the end (such as a Charitable Gift Annuity or Charitable Remainder Trust). Note that a Charitable Gift Annuity or Charitable Remainder Trust take time to set up and only the actuarially determined value of the remainder gift to charity is tax deductible.

A good old-fashioned check written to a charity is equally effective. Just make sure your envelope is postmarked by December 31. Or, go online to your favorite charity and make your donation by credit card, but make sure your account is charged by December 31. If charitable giving has not been your regular practice in the past, this may be the year to start.

Planning Ahead Column

By Lisa C. Alexander, Esq.

Contact Lisa by calling 310-395-6555, or 310-656-4310.

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