Reduce Taxes through Gifts to ASHRAE Foundation

ASHRAE's members make charitable gifts to support the ASHRAE Foundation for many reasons. Tax benefits are only one of them and donor surveys typically indicate that tax savings are far from the most important motivation for most donors.

Nevertheless, the American Taxpayer Relief Act (ATRA) passed by Congress on January 1 to avoid the "fiscal cliff," along with the Affordable Care Act of 2010, have inaugurated a host of changes to U.S. federal tax rules that will alter the tax incentives for making charitable gifts, including planned gifts.

Higher Income Taxes in 2013

The top federal income tax rate has increased from 35% to 39.6%. All other federal income tax brackets stay the same as they were in 2012. The new top bracket applies to single taxpayers with taxable income over $400,000, married filing jointly and surviving spouses with taxable income over $450,000, and heads of households with taxable income of $425,000.

Net Investment Income 3.8% Surtax

This new tax went into effect on January 1, 2013 and is imposed on top of other income taxes. The surtax kicks in when your gross income is above $250,000 for joint returns and surviving spouses, $200,000 for heads of households and single taxpayers, and $125,000 for married filing separately.

Capital Gain Tax Rates in 2013

The top federal tax rate on most long term capital gain income and qualified dividends has increased from 15% to 20% for high income taxpayers. The taxable income thresholds for the 20% rate are the same as for new 39.6% income tax rate discussed above: single taxpayers with taxable income over $400,000, married filing jointly and surviving spouses with taxable income over $450,000, and head of households with taxable income of $425,000. Taxpayers who are in the 25% - 35% income tax brackets still pay 15% on this income, they pay no capital gain tax if they are in the 10% or 15% income tax brackets.

How Charitable Giving Can Help Reduce Your Tax Bill

Outright Gifts of Appreciated Property

The higher tax rate on long term capital gain means that gifts of appreciated property to ASHRAE Foundation will be particularly attractive if you also have a high income. The benefit from a gift of appreciated property is twofold. First, the gift generates an income tax charitable deduction equal to the value of the property donated. The silver lining of higher income tax rates is that you will have greater tax savings from taking a charitable deduction against a higher income tax rate
Second, because you are able to avoid a higher capital gain tax than in past years, gifts of appreciated property also relieve you of the capital gain tax that would otherwise be due on sale of that property. That is a double tax benefit, higher income tax savings and higher capital gain tax savings.

Charitable Remainder Trusts

A charitable remainder trust (CRT) can be particularly useful in planning to avoid the impact of higher capital gain and income taxes. Because a CRT is wholly tax-exempt, property having significant appreciation can be transferred to a CRT and then sold without triggering income, capital gain or the 3.8% Medicare surtax. The income from a CRT smooth's out the reporting of income and capital gain taxes. The income from a CRT is taxable to the income beneficiaries on a worst in/first out basis. That means the most highly tax burdened CRT assets are considered the first distributed to the income beneficiaries of the CRT. Any ordinary income and income subject to the 3.8% Medicare surtax earned each year are distributed to the beneficiaries first. Once that income is reported, the capital gain income is distributed to the beneficiaries. Therefore, income and capital gain tax are only subject to tax to the extent the beneficiaries receive income. In addition, this income is spread out over time rather than being due in the year of the sale of the trust assets. The use of a CRT may result in the elimination, reduction, or at the very least, the deferral, of the income and capital gain tax realized by the CRT.

Conclusion

A charitable gift of appreciated property to ASHRAE Foundation, whether outright or in trust, can help you reduce the impact of the higher tax rates in 2013.