Basic tax planning practice dictates that one should always review his or her affairs and consider taking certain steps before year-end. Planning for 2008 is no exception. This year, however, the volatile economic times may require consideration of additional planning opportunities.
Maximize your annual exclusion gifts
In 2008, every individual may give anyone else up to $12,000 free of gift tax by using the annual exclusion. Gifts can be made outright or to custodial accounts, to trusts for minors and to certain other types of trusts so long as the donee has the right to enjoy the gift immediately. If annual exclusion gifts are made to several donees, it is possible to shift significant value from the donor’s estate to the next generation each year free of tax. Splitting gifts with a spouse may double the amount a person can give under the exclusion. Any gifts that are not completed in 2008 (such as uncashed checks) are ineligible for this year’s annual exclusion, and therefore the exclusion will be partially wasted. Of course, another round of annual exclusion gifts may be made in 2009, when the exclusion amount increases to $13,000 per donee.
Use depreciated assets for gifting
The recent drop in the value of stocks and real estate may make them more attractive for gifting. For gift tax purposes, property is valued at its fair market value. So, lower values mean more assets may be given away for the same tax cost.
Also, for income tax purposes the general rule of thumb has always been to give away assets with a high basis, because the donee normally takes the donor’s basis in the gifted property. Retaining low-basis (that is, highly appreciated) assets until death, when the assets will receive a “step up” in basis equal to their date-of-death value, minimizes the amount of capital gains the donee must eventually recognize.
However, this concern over the gift recipient’s future capital gains is diminished in a world where fewer assets have built-in appreciation. As a result, donors may find themselves with more funding options for their gifting.
It is important to keep in mind, though, that the recipient’s new basis in the gifted property will equal the lesser of the donor’s basis or the property’s fair market value at the time of the gift. This means that if the value of a depreciated asset subsequently rebounds, a portion of the donor’s basis may be lost as a result of the gift. Therefore, it will usually be best to give away depreciated assets that nevertheless are worth more than the donor’s basis.
Rethink funding of charitable gifts
Charitable giving is also entitled to year-end consideration, since deductions against 2008 income must be completed before the end of 2008. However, taxpayers may wish to rethink using depreciated stock or cash to fund their gifts to charity this year.
Perhaps a more tax-efficient source of funding would be the donor’s individual retirement account (IRA). The popular “charitable IRA rollover” rules, which expired at the end of 2007, were recently extended to 2008 and 2009. Once again, anyone age 70½ or older may make a direct trustee-to-charity transfer of up to $100,000 from his or her IRA to a public charity (but not a private foundation, a supporting organization or a donor-advised fund), without having to include the distribution in his or her income for the year. The distribution/contribution also counts against the taxpayer’s required minimum distribution for the year.
Offset earlier capital gains
Another year-end planning consideration is to accelerate the realization of capital losses into 2008 if doing so will help offset earlier capital gains. Of course, there are holding periods, wash sale rules and other factors to be considered before selling any capital asset, but such planning may help make a taxpayer’s capital gain transactions more tax efficient in this volatile economic market.
In sum, the basics of year-end planning for 2008 are the same — complete annual exclusion gifts and make charitable contributions before the end of the year, and offset earlier capital gains with losses where possible — but the standard rules regarding the appropriate assets to give away may have shifted. On the bright side, many more assets can be transferred in 2008 for the same tax cost, which will hopefully result in much greater wealth finding its way into the hands of donees in the long run.