18 | RKL 2018 Year-End Tax Planning Guide RKL 2018 Year-End Tax Planning Guide | 19 The charitable deduction has always been a flexible and beneficial option for philanthropically minded people to support the causes they care about and reap tax benefits for doing so. In light of tax reform’s increase to the standard deduction and changes to allowable itemized deductions, taxpayers must identify the optimal timing and methods of donation to ensure maximum tax savings for their charitable giving, which the strategies outlined below. Keep in mind that the income limitation for cash donations to public charities changed from 50 percent to 60 percent of adjusted gross income (AGI) under tax reform. Capital gain property donations (like appreciated stock) are still capped at 30 percent of AGI. • Bunching method: Prepaying charitable contributions on an alternating or every few years basis (also known as bunching) allows taxpayers to itemize deductions in the year contributions are made and use the standard deduction in years featuring little or no donations. Future donations are repeated according to the established timetable. • Donor Advised Fund (DAF): DAFs may be used in tandem with the bunching method. Here’s how it works: a taxpayer funds a DAF in year one with a large donation and claims the itemized deduction. In the subsequent years, the taxpayer directs the amounts and timing of distributions from the DAF to favorite charities and takes the standard deduction. Timing plays a major role with this method, so be sure to develop a plan with your advisor to execute DAF donations in years with larger projected tax liabilities. This provides tax savings at times when marginal tax rates may be higher. • Donation of appreciated assets: Once appreciated, assets like common stocks, mutual funds or ETFs can be donated. This may further enhance the tax savings by shifting the unrealized capital gain to a charity or DAF with no tax liability on the sale of those securities. • Qualified Charitable Distribution (QCD) from IRA: Taxpayers over age 70½ can make a QCD from their IRAs and reap dual benefits: supporting a cause important to them and getting closer toward their IRA annual Required Minimum Distribution. Keep in mind that the maximum annual QCD limit is $100,000 and this method is not permitted to fund DAFs, private foundations or split-interest charitable trusts. CHARITABLE GIVING IN THE TAX REFORM ERA SAVING FOR EDUCATION EXPENSES just got easier Tax reform modified rules around 529 plans, now allowing proceeds up to $10,000 per account to be used for qualified expenses related to not only higher education but also public, private or religious elementary or secondary education. Any distribution in excess of $10,000 for elementary or secondary education would be subject to tax under the rules of Section 529 of the IRS Code. 529 plan savers can still avoid taxes on gains and withdrawals from these accounts so long as proceeds are used for qualified higher education expenses. Savers can also obtain Pennsylvania tax deductions for contributions, subject to income and gifting limitations. ESTATE & GIFT PLANNING CRYPTOCURRENCY tax impact As virtual currencies like bitcoin and ethereum draw the attention of investors, the IRS maintains its 2014 guidance on their taxability. According to the IRS, virtual currency transactions are legally taxable and these cryptocurrencies should be treated as property, akin to stocks, bonds or real estate property, not cash currency. As a result, the sale of any cryptocurrency triggers the requirement to report gains and losses. Investors that simply buy and hold the currency are under no reporting requirement. Unlike stock or bond sales, which are documented with a 1099 from a bank or brokerage, virtual currency exchanges may not provide investors with documentation to substantiate sales, gains and losses. As a result, investors should consider keeping their own detailed records of transactions for greater ease in calculating tax obligations. A critical component of any wealth management strategy, estate planning lets individuals maintain financial security now and codify their wishes related to the transfer of property and assets after their death. Several provisions of the Tax Cuts and Jobs Act unlock new opportunities for gifting and estate planning. While tax reform retained the maximum federal estate tax of 40 percent, it doubled to $22.4 million the amount married couples can exempt (adjusted annually for inflation). Like the rest of tax reform’s individual provisions, this joint exemption amount will sunset to half the exemption in place in 2025 without additional legislative action. Individuals should consult with their advisors and consider the following efforts to maximize potential benefits. • Review estate plan documents: Standard financial best practices suggest periodic review of estate planning documents like trust documents and wills, but reviews become even more critical in the post-tax reform landscape. Between the scheduled federal sunset and the potential for changes on the state level, estate planning documents should be flexible and allow tax-planning adjustments and decisions to be made after a spouse’s death. • Increase gifting: Assuming that the federal estate tax exemption will revert back to the 2017 level of $5.49 million (per individual) after 2025, tax reform affords individuals a limited window between 2018 to 2025 in which to make significant, estate tax-free gifts directly to family members or into trusts. The doubling of the exemption ($11.2 million per individual and $22.4 million per marred couple) is an unprecedented opportunity for high net worth individuals to remove more assets from their taxable estate, particularly when coupled with other discounting techniques. Keep in mind the annual exclusion increased for 2018 to $15,000 per recipient or $30,000 if married. The exclusion must be used by December 31 with no carry over. • Maximize lifetime gifts and generation-skipping transfers: The generation-skipping transfer (GST) exemption is linked to the lifetime estate tax exemption, which means taxpayers have several opportunities to maximize GSTs by revisiting irrevocable trusts that previously faced GST-related issues and consider making a late allocation of GST-exempt funds, where appropriate. Making additional $5 million irrevocable GST gifts, which shifts future appreciation and locks in use of the increased exclusion, is another option to consider. Tax reform did not alter the portability of a deceased spouse’s unused exemption or the step-up in basis on inherited property. Although the increased exemption will greatly reduce the number of estates subject to transfer tax, there are still many considerations that make estate planning important, like asset preservation, family business succession, guardianship of minor children and providing for family members with special needs. Be sure to discuss these and other priorities with your RKL advisor, who can take a holistic approach to developing an estate and gifting approach that meets your unique situation. RKL 2018 Year-End Tax Planning Guide | 19