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Charitable giving in unclear tax times

Charitable giving in unclear tax times

Hurry up and wait – that's what some financial advisers are telling their clients as an uncertain tax environment makes it tough to plan charitable giving in 2012.

Some clients may want to give big now because the charitable gift tax write-off is among the deductions that may become a casualty of tax reform. But tax rates for the wealthy could jump next year, in which case they'd want to set aside deductions for 2013, when the deductions potentially would be worth more.

Given the uncertainty, it's a good idea to have clients hold off on big gifts until late in the year in hopes that there will be more clarity after the elections, tax experts say.

"Why not have all the best information before you make a significant decision?" suggested Mark Blumenthal, chairman of the family office practice at Plante Moran, a Midwest regional accounting firm.

Still, there are things that should be done now to lighten your workload for the last few weeks of the year.


First, map out four or five strategies for charitable clients, built around possible election results.

The election comes just before the Bush-era tax cuts are set to expire, unless Congress decides to extend them. This means the rates for all income tax paying Americans would increase at year end. Additionally, those who make about $177,000 and up would also see their itemized tax deductions cut.

President Barack Obama supports maintaining ordinary income tax rates for families making less than $250,000 annually. For incomes above that level, he favors raising the top two tax brackets to 36 percent and 39.6 percent. Those rates are now at 33 percent and 35 percent. He'd also like to cap itemized deductions at 28 percent of adjusted gross income for wealthy families.

Republican Mitt Romney has promised a 20 percent income tax cut for all Americans, a move he said would be revenue-neutral because he'd offset it with caps on deductions. He has floated the idea of a cap ranging from $17,000 to $50,000.

Of course, it's not just a matter of who takes the White House. You also have to factor in which party wins control of Congress and the chance that an agreement on taxes will be reached in a lame duck session.

Mapping out your clients' alternatives could include scenarios for what they could do if the Democrats win the White House but lose control of Congress, and vice versa. The same holds for the Republicans.

This is essentially what Brian Wodar, national director of nonprofit advisory services at Bernstein Global Wealth Management, did after a client said he'd hold off on giving his church a six-figure gift in expectation of getting a bigger tax benefit next year.

After Bernstein and the client's tax adviser explained it wasn't a given that he'd get a bigger benefit by waiting, the man decided to split the gift across this year and next.

"All we can do is provide them the landscape within which they can make that choice," Wodar said.


Start setting the groundwork for your clients' gifts now.

Everyone involved "can make better decisions with two months to go, than with two days to go at the end of the year," said Ken Nopar, a philanthropic consultant to wealth advisers.

Help clients earmark the assets they'd like to donate. After this year's stock run-up, appreciated equity holdings are a good choice as they allow the donor to avoid capital gains taxes.

Also identify clients whose yearly incomes were higher than usual, like those who sold a business. Tell them that, regardless of the election, this is a good year for them to take a big deduction because of their higher income.

If you have clients who need more time to chose the best places to give, help them set up a donor-advised fund. These individual accounts give donors a current-year tax deduction on contributions but release funds on the donor's timetable.

Though it takes less than a day to set up one of these funds, do it now so it's ready to go if things get hectic at year end. The accounts, which often require an opening deposit of around $5,000 to $10,000, can be established through providers like Fidelity Charitable, Schwab Charitable and Vanguard Charitable and also through community foundations.

Another tip: introduce yourself to the director of gift planning at a community foundation now, before he or she is inundated with calls at the end of the year, suggested Jason Baxendale, director of gift planning with The Chicago Community Trust. The foundation can help you identify good places for your clients to donate their money.

Overall there's no excuse to procrastinate, said Bernstein's Wodar.

"Putting it off until we have some kind of certainty with taxes may literally mean you never ever do planning," he said.

© Copyright 2012 Thomson Reuters.

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