7 1/2 Tax Smart Giving Strategies You Need to Know in 2020
For the definitive guide on tax-smart giving strategies in 2020, download the PDF below. Discuss this with your financial advisor and start planning now. These strategies are limited to the 2020 tax year only.NCF-California-CARES-Act-Bryan
Bryan: Hey, everybody. Welcome back to the Bob & Bryan Show are Bryan Feller here with Bob Fry. And this morning we are talking about the 7 1/2 tax smart strategies that you have absolutely got to know in 2020. And we’re just going to jump right into it. First, let’s talk about stocks, bonds, and other good stuff. Bob, talk to me about what this year looks like.
1. Stocks and Bonds
Bob: Well, the good news, Bryan, is that we’re going to get into some things that are changed this year – there are some new deductions that are available that are really cool, but they are all added to the things that we can already do. Nothing has been taken away. So for example, gifts as stock – one of the great tax advantages for wealthy people.
You can donate appreciated stock, long-term capital gain property that you’ve held more than a year. You will get a full fair market value deduction based on its value the day you sell the stock. You can put this cash into your giving fund, and you don’t have to recognize or pay any tax on the embedded capital gains. So making a gift of appreciated long-term assets is a really cool thing to do, and all of those rules continue. All of those rules are exactly the same as they’ve been. Nothing’s lost.
Bryan: Got it. Okay, good. So nothing’s changed. We can all do the things that we’ve already been doing really well.
Bob: All the good stuff is still there. That’s correct.
2. Retirement Assets
Bryan: All right. Well, number two is retirement assets, and things have changed this year. So before this year, if you were 70 1/2 years old, you can give your minimum distributions directly to a charity. Talk to me about what’s changed this year.
Bob: All right. What’s changed this year, is that under the CARES Act, which was passed only 90 days ago, there is a 100% income tax charitable deduction for gifts of cash. So if you give cash to a public charity, you can take a deduction up to the full amount of your income. You don’t have to pay any federal income tax if you make a large enough donation. So things like retirement funds, anything you have in an IRA account, a 401k plan, a pension or profit sharing plan.
Once you’re over age 59 1/2, typically you can pull money out of those without a penalty, but it is still considered income. It’s ordinary income, so you’d have to pay tax on it. Well, in a normal year, if you pull out a $100,000 and you’re in the 50% tax bracket, even if you give away a $100,000, you only get a 50% deduction. So you’re still going to have a tax liability of $25,000 or more. This year, you can pull any amount of money out of any of those accounts, donate the cash to a public charity, and take a full deduction and not pay any tax on your increased income. So that 100% deduction gives us access to those assets that create income.
Bryan: Wow, that’s fantastic.
Bob: Yeah. No, it’s incredible and it’s only until December 31st of this year.
3. Employment Stock Compensation
Bryan: Okay. Let’s talk about employment stock options. Typically, a lot of folks get paid with employee stock options. When they exercise those options it’s a big cash event – ordinary income. And like our previous example, you’re stuck with a tax bill even if you give it all away. What’s changed this year?
Bob: Yeah. The stock options are interesting. There are qualified, non-qualified, and restricted share units; these are the most common. And with all of those, you can’t give the contract away. The IRS has pretty tight rules that keep you from giving that contract away the way you can with normal shares of stock, for example.
So you’re forced to exercise. You always have an income event, either capital gain or ordinary income. And again, in a normal year, if you exercise your option the highest deduction you can take is 50% or 60%. But this year, if you exercise your stock options and you want to give away all the cash to charity, you can do so and take a 100% deduction. So just like with the retirement assets, the availability to take a 100% deduction gives us access to those funds in a way that we normally don’t have if you want to do charitable giving.
4. Encumbered or Polluted Real Estate
Bryan: Excellent. Let’s talk about number four, encumbered or polluted real estate. We facilitated a gift for a gas station once, but it was pretty challenging. Talk to me about how you work with these kinds of assets?
Bob: Yeah. I actually owned a gas station at one time and it looked a little better than that one, right? But in the modern world, they’re difficult assets to give to charity because of the potential environmental liabilities. The environmental liabilities can exceed the value of the asset. You also have a hard time with real estate that has debt on it, because if you give it away, your deduction is limited to the amount of the equity. And in addition, the debt forgiveness is treated as a bargain sale, and so you can also have some taxable income.
And finally, with encumbered real estate, the charity has to be worried about how they’re going to make those payments on the mortgage if, for whatever reason, the income stream associated with that property goes away. So encumbered real estate and polluted real estate, or potentially polluted real estate, those are very difficult things to give to charity. So this year sell them, sell them. It doesn’t matter what the gain is. You can give all the gain away and not pay any federal income tax.
And the individual buyers can choose to purchase property with potential environmental liabilities. They don’t have the same fiduciary duties that charities have. It happens every day. They can choose to take encumbered property. It happens every day. It is so much easier to sell those things and donate the cash sometimes than it is to give them away. This is the year to do that.
5. Art and Intellectual Property
Bryan: Got it. Well, let’s talk about art and intellectual property. Typically, art has not been a big thing for NCF, because it was just the problematic nature of donating it. Talk to me about how are we looking at this this year.
Bob: We’re unfortunately showing sort of our low brow status here, Bryan with our selection of the art. Not that dogs playing poker isn’t pretty cool. The problem with art, intellectual property and inventory – three different things – is that they are all ordinary income assets when donated to charity. Meaning, your deduction is limited to your basis. You don’t get a fair market value deduction.
With art, the only way you get a fair market value deduction is if you’re giving it to a charity that can actually hang it on the wall and use it as part of their ministry. But if you’re giving it to them and they’re going to sell it and take the cash, then your deduction is limited to fair market value. So in that situation with intellectual property, for example, you’ve created a patent. Your basis may be zero. You get no deduction.
Well, why not sell it, get the cash and now you could turn around and donate the cash and whatever your gain is; you can make it all and go away. If your basis in your art is only 50%, you can sell it, just give away the 50% that represents your gain and keep the other 50% and still make all of your federal income tax liability.
Bryan: Excellent. Let’s talk about losers. We typically can’t give losers because they’re losers. They’re taking losses. Talk to me about what really changes this year.
Bob: Well, again, it’s the same thing. Every wealthy person has investments that they wish they hadn’t made or they have things that they inherited. Susan and I have a 160 acres of desert in Eastern Oregon with no water on it. And you don’t normally donate capital assets in which you have losses because you don’t get to deduct the loss and the charity can’t deduct the loss, because they’re not a taxpayer. So there’s really no benefit to the asset gift. This is the year to sell it. Sell it, take your loss. You can deduct your capital loss against other capital gains that you have.
And with capital losses, there’s an unlimited carry forward. So sooner or later you’ll have capital gains and you can take that loss. In the meantime, you’ve generated cash that you can then donate and deduct against other income. So this is the year to clean out the asset attic or the asset garage. Take a look at everything you have that you want to get rid of. And if you can sell it, sell it. Take the loss, donate the cash.
7. Private Company Sales
Bryan: Got it, got it. Private company sales, these have been good. These are still good. If someone is going to have a cash event by selling their business – we had a few donors already do that this year – they can donate stock presale and avoid capital gains on the portion that we own. It’s a great strategy. What changes this year?
Bob: Yeah. It is a great strategy. It’s exactly like the publicly traded stock strategy, where you are making a gift presale, taking a fair market value deduction, and not recognizing the gain. The problem is that it was a private sale. It’s a whole lot more complicated. You have to get an appraisal, for example, to validate your deduction.
And if you start working on the gift too late, relative to the intended closing of your transaction, there are all kinds of problems. You can’t walk in at the last minute and tell your buyer, “Oh, by the way, we’re going to give away half our stock and this charity that you don’t know is going to join in. And after their lawyers have looked at all the documents, we’ll still go ahead and do the deal.” Your buyer’s head will explode. You put the deal at risk. Your attorney’s head will explode. So if you get too late in the planning of it, it’s very difficult to do a presale gift.
This year, you have a different opportunity. You just go through the sale, you get your proceeds and whatever amount of gain you have, and you can give it to charity knowing that is fully deductible up to the full amount of your income.
The gain from your sale increases your income. You can turn around and give that gain away, not pay federal income tax. The only way you get in trouble this year is if you wait too long relative to the end of the year. You’ve got to complete this gift to get the 100% before December 31st, 2020.
7.5 Short-term Capital Gains
Bryan: Gotcha. Okay. Well, the 7 1/2 strategy as short-term capital gains. This is kind of unusual. This kind of ties to number one with little caveat. So talk to me about short-term capital gains in 2020.
Bob: Yeah. We don’t see a lot of stock donations with short term capital gains. Because again, your deduction is limited to your basis in the stock. You still avoid the recognizing the income. So let’s say you have $100,000 of stock, $50,000 basis, you’ve only owned it for six months; You make that donation, you get a $50,000 deduction, and you don’t have to recognize the gain. People normally try to wait until they’ve held it a year and a day, because then they get a $100,000 deduction, a fair market value deduction, and don’t recognize the gain.
So this year, again, you have the opportunity to just sell it. And in the example I just gave, if you have $50,000 of gain from a $100,000 stock sale, you can take $50,000 of your proceeds, donate that to charity and not pay any tax. As opposed to giving away all the stock in order to avoid that danger. There’s a little bit of an Ananias and Sapphira thing going on here. You want to be a little careful that you’re not telling God, “Hey, look at the good things I’m doing.” But from a pure tax planning standpoint, being able to sell short-term gains and donate the proceeds is pretty cool this year.
Bryan: Yeah. Well, as I recall, it wasn’t tax planning that actually got them in trouble.
Bob: It was lying that got them into trouble. Yeah, yeah.
Bryan: Well, these are the 7 1/2 things that you should definitely talk to your advisor about in 2020. In all likelihood, this will be the only year that you can do a lot of these things, because I don’t know that 100% deductions will ever come back in our lifetime. They might, but I wouldn’t plan on it.
So I’m Bryan with Bob Fry here. Thanks for watching the Bob & Bryan show and we’ll see you on the next episode.
Bob: All right. Great. Thanks guys.