If anyone tells you they know where the market is headed, you know to run the other way as fast as you can.  If anyone would have told you they predicted that the Iowa Hawkeyes would be 7-0 to start the season, you also would have laughed and found a way to escape.  Well, the Hawkeyes ARE running wild on their opponents right now and the markets are having another classic up and DOWN year……much like the Cyclones!

Fall not only brings out great scenery, great weather, and great football, but it is also a time to start thinking about your final giving strategies for year-end.  –

If you are giving to individuals, every person can give to another person $14,000 with no tax issues.  This is called the ‘Annual Exclusion Amount’.  So, if a husband and wife want to give to their son and daughter-in-law to the maximum amount, they could give them $56,000!  Husband gives $14,000 to his son and to his daughter-in-law.  Wife gives $14,000 to her son and also to her daughter-in-law.  This is a great strategy to pass along some of your wealth while you are living and want to start the wealth transfer process.  This also allows you to see how your kids (or whoever you give to) are using the money…..wisely or otherwise.  Any amounts below the maximum are fine and there shouldn’t be any tax issues.  If you give property or securities, the kids, in this case, would inherit your “cost basis,” so if they sold the property, they would potentially have to pay capital gains tax on the appreciation.  Giving cash (writing a check) is more popular and usually less hassle.

If you plan to give to charitable organizations, the options really start to become endless.  I’m going to focus on the use of three of the most popular and effective giving strategies.

  1. Donor Advised Funds
  2. Endow Iowa
  3. Student Tuition Organizations

The first strategy, using a Donor Advised Fund, is becoming the norm in giving appreciated securities and/or cash to charitable organizations.  Here are the basics; you need to open your own DAF at a qualifying institution….at Foster Group, we are using the Greater Des Moines Community Foundation, Charles Schwab, and the National Christian Foundation.  All are great places to open your own fund.  You can name it almost whatever you want.  The DAF allows donors to make a charitable contribution, receive an immediate tax benefit and then recommend grants from the fund over time.  You can pass through all the money each year, or invest it and grow the fund over time.  You can give cash, securities, or sometimes property.  An easy way to think about a DAF is your own personal charitable savings account.  You get a Federal and State tax deduction for your gift to the DAF.  If you do give appreciated securities, you will most likely get a deduction for the full value of the security and the charity pays NO capital gains taxes upon sale.  See below for a quick example of how this would work.

Dave and Susie want to give away $25,000 in 2015, but they are not sure to which charities they want the money to go.  They have some stock with a basis of $10,000 in their brokerage account that are now worth about $25,000. What should they do?  ANSWER:  Open a Donor Advised Fund!  Here are the steps:

  1. Contact your trusted wealth management firm 🙂
  2. Open a Donor Advised Fund (takes about 20 minutes of paperwork)
  3. Identify the shares in your brokerage account to transfer electronically to the DAF (we do this at FG)
  4. Authorize the transfer and then sit back and reap the tax-benefits
  5. Most importantly, identify the charities you would like to impact, and enjoy the blessings of giving

Dave and Susie get the Federal and State tax deduction for the full gift of $25,000.  The DAF will sell the stock and avoid any capital gains taxes.

The second strategy is basically the same as the first strategy with a TWIST!  In Iowa, we have the “Endow Iowa” Tax Credit Program.  This super-charged giving strategy is amazing when used properly and is also a good fit for people who want to build a fund and parcel out gifts over time.  Essentially, you do all the steps as listed above, but with the Endow Iowa plan, you get a Federal Tax deduction and a 25% state tax credit!  There are two caveats to remember with this program… have to give to IOWA charities and you only get to give 5% of the balance of the fund away each year….thus the name….Endow Iowa.

So if Dave and Susie give $25,000 away and use the Endow Iowa Donor Advised Fund, they still get a Federal deduction for their gift AND the state of Iowa tax credit of 25%.  So, the real cost to them?  See below.

$25,000 gift
<7,500>  Federal Tax Deduction @ 30%
<6,250>  State Tax Credit
$11,250  real cost of the gift*

The final strategy is also similar to the first two, with another super-charged twist….in Iowa, we also have what’s called “Student Tuition Organizations”.  See info below from the Iowa Department of Revenue:

A School Tuition Organization Tax Credit is available for individual state income tax equal to 65% of the amount of a contribution made by a taxpayer to a school tuition organization. A school tuition organization must be a charitable organization in Iowa that is exempt from federal taxation under section 501(c)(3) of the Internal Revenue Code that allocates at least 90% of its annual revenue in tuition grants for children who reside in Iowa to allow them to attend a qualified private school of their parents’ choice. The contribution cannot be used for the direct benefit of any dependent of the taxpayer or any other student designated by the taxpayer.

Total awards are capped at $12.0 million in 2014 and later, where at most 25 percent of awards can be awarded to corporations making contributions eligible for the School Tuition Organization Tax Credit.

Effective for tax years beginning on or after January 1, 2013, the credit is available to partnerships, limited liability companies, S corporations, estates, and trusts.  The credit is based on the pro-rata share of earnings from the pass-through entity.

The school tuition organization must represent more than one school, and they can only provide tuition grants to eligible students who are members of households whose annual income does not exceed an amount equal to three times the most recently published federal poverty guidelines published by the U.S. Department of Health and Human Services.

When the tax credit is awarded by a school tuition organization, the taxpayer receives a tax credit certificate number that must be reported on the IA 148 Tax Credits Schedule when the tax credit is claimed. Any credit in excess of the individual’s state tax liability is not refundable but may be credited to the tax liability for the following five years or until depleted, whichever is earlier. The amount of the contribution cannot be taken as an itemized deduction for charitable contributions for Iowa income tax purposes.

In summary, if Dave and Susie give the same $25,000 to a STO, here is their tax benefits:

$25,000 gift
<7,500>  Federal Tax Deduction @ 30%
<16,250>  State Tax Credit @ 65%
$ 1,250  real cost of the gift*

I know…..CRAZY COOL!  If you don’t mind giving to private education, this is an amazing strategy.  You give away a $1 and get back 0.95!

So, NOW is the time to be connecting with your trusted advisor and discussing which, if any, of these strategies will fit into your overall planning.  Have a great Thanksgiving and holiday season!



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