Suncoast Business Forum; Financial Planning Special

The. Phone is a special presentation of w. we do YOU Tampa St. Petersburg Sarasota Every office has one. The chatterbox that concept. But no office ever had and she. Just said you name it she got it. 48 hours is pretty good stuff. Do you realize that on average each of us worth two and a half months every year just pay our federal income taxes. And that number's been rising later. Looking for ways to cut your tax burden. Well you come to the right place. We're going to show you how to reduce your tax fight. And we're also going to show you how to use charitable giving to do good while you lower your taxes. Up next the Suncoast business form. If you could cut thousands of dollars from your annual tax bill would you do it.

If you could target your charitable dollars to get more bang for your buck would you do it. Well you're about to meet a panel of tax and financial experts who can help you do that. I'd like you to meet Kristen Conley a tax attorney with the law firm of Carleton fields. Steve Afanasy a certified financial planner and president of trademark capital a regional financial fee only financial planning firm. And Steve Spangler a certified public accountant and tax specialist with the accounting firm of cabin on company. Welcome to the Suncoast business form. Kristen If I want to cut into Uncle Stan Uncle Sam's bite on my income taxes this year are the things that I can do now and between now and the end of the year they'll help me do that. Well sure there are a lot of different ways you can look at doing that one ways to do for the income that you have this year. There are certain things that you would want to do over

items you have more control over. Things are going to sell I think. Talk about that a little more later in terms of capital gain property in terms of your compensation income individuals or cash basis taxpayers which means that you have to include income when you receive it. So for the most part that's not. You can't do too much with that because once you receive your your wages you receive them. However there are some opportunities for deferral at the end of the year if you are say entitled to a bonus for example. And you let your employer know before you're actually entitled The board bonus before you receive it because that's a no no before you receive it if you let your employer know that you really would like to defer that until next year. As long as that deferral takes place within the first two and a half months of the following year you can defer that compensation into next year without having to include it this year which can oftentimes be a big help. So you get today's pay push out into next year. Right. OK Steve Spangler anything else you might be able to do. Well with with income I think the key is to understand that individuals are cash basis taxpayers that's the phrase everybody should follow. So it's when you receive the cash or for expenses when

you spend the cash items that you can control for example the expenses you can pay your real estate taxes either now or you can wait till January and then next year pay him on time again in November. You get to real estate taxes in one year. Or if there is charity you make a donation not pay one this year pay it in January pay the next one in November December. Anything you can control. You paid in the year you want to have that you duction think the one key is you need to be looking not at this year's income. You need to be looking at this year next year the year after. What year do I want these things to fall into that you can control certain items you cannot control your bank is going to expect its mortgage payment every month. You can't go to the bank and say let me pay six months from now they will not allow you to do that. So the things you can control decide what you're to put it into. Now you mentioned expenses expenses are important. They're particularly important for people who are itemizing their tax deductions right.

Correct. The married filing joint return itemized deduction. Ballpark you get a $10000 write off automatically. But you can lump these deductions together and exceed 10000. You will get the higher number. But for some people that don't have itemized deductions you're going to get 10000 automatically. So if you have less than that if you can lump some deductions together maybe this year you take the standard deduction. But next year you Lumpy real estate taxes for two years your charity for two years. Any medical for two years lump those you might have 15000 of the adoptions that year. So you take the 15 and you save taxes. I think there are also some other expense issues that we can take into account for example there's a 179 in equipment expense it's a one time expense each year that you get to write off I believe this year it's about around a hundred thousand dollars and if you haven't used that entire expense this year if you're a small business the key is to think about. You can offset that expense against any trade or business that you have and your job is actually considered a trade or business so if you have a regular job and are starting a sideline you can buy and buy equipment this year that maybe you were

going to buy until next year but this year you can buy that expensive right away and offset current income with it. I think Steve's point is very well-taken in that it really depends on what your current situation is. I mean I can I can give a personal anecdote in that in that I'm getting married next year and one of the things that you want to think about is how is your how is your situation any different next year than it is this year it may not always be the best case for you to defer your income from this year to next next year I'm going to get hit with a nice marriage penalty. And so it might be better for me to accelerate income into this year in a lower tax bracket. So those are all things that you want to consider when determining what you have control over whether you accelerate expenses or differing. I think it's important to add that any life transition that you're facing is really important to planning around whether it be marriage or retirement. If you're facing a major life transition then don't do it what Steve mentioned about looking at both yours as one it is really important to do that. I think there's one other thing here you need to keep with this new tax law. Some of those provisions are affected now. So you have to be careful. And some of them are in effect even till

January 1st. So you got to go OK this one I can deal with now. This one I have to wait till next year especially in Florida the big thing here is the sales tax that is not inducted well this year unless Congress changes something in the next couple months. You're out of you're out of tax write off Steve Afanasy other other other the doctrines that I can consider taking that will actually help me lower my taxable income. Well one of the one of the most important I think to consider especially as people looking forward to retirement is any tax deferred savings that you could do whether through a company sponsored for one k plan or an IRA plan. And when you really think about it the government is in essence saying that if you're in the 35 percent tax bracket for every three dollars you're investing you're going back over a dollar in terms of a tax refund that's an instant return on your money. By simply doing these tax deferred savings type vehicles and really it accomplishes two things it helps save towards retirement and saves immediate tax dollars. Let's talk about saving now we're not talking about income anymore let's talk about capital gains the market's been up.

People have made money in real estate. Capital gains is an issue for many of the people out there who are watching this program. Are there things that people can do to actually lower their their capital gains consequences. Steve. Well the thing to remember with capital gains is you're able to offset with capital losses. And sometimes what people do is they carry on their books unrealized capital losses meaning that they're down in an investment but they just haven't yet sold it. Now there is a holding on in hopes that it's going to come back. Very often what they need to do is look at what the capital gain is that they might be facing that year and maybe sell those those investments that are that are losing very often the reason why people hold on to the investments is because the fact that they think they're going to come back so what you could actually do is is sell the investment but buy something in the sector perhaps a good example is is the tech sector. If you want to tech stock that you might have bought back during the boom and you're still at a loss. Sell the tech stock but buy an exchange traded fund or mutual fund that's in the tech sector. So therefore you get the benefit of still staying

in the market and getting out of the investment and taking the loss. That's especially important consider here and now we're in an environment where the capital gains tax is as low as we've seen it in a long long time as it is sometimes just. Right to bite the bullet and say look it's 15 percent Steve. Yes there's a lot of times the situation if you know that the investment is capped out it's not going to grow. You want to take your money off the table sell it pay the 15 percent you know you don't know what that that race is going to be next year or two years from now. Take that take again now. No problem. Well what why we're talking about offsetting taxes and if people do as you mentioned Steve that people do have losses can these losses be used to do to offset anything other than just their capital gains Crist. There's a limit on that actually. Capital losses can only be used to offset ordinary income to the extent of $3000 a year. However those losses can carry forward to offset capital gains in the future. So it is something to consider that if you're going take a large capital loss you do you want to offset it and

nice large capital gain or you would have to carry it forward. You know the other thing the think about there is you might have an installment sale that if you have a capital loss you might go to the installment sale and go to the person holding You're holding the note say pay me some ahead of time and create installment capital gain by giving a discount to that person to say pay me a year ahead of time offset that pay no tax on it. Take advantage of it right away. Well we're talking about capital gains and deferring capital gains tax on the sale of different assets. Is there some way to actually defer capital gains on a long time with something like like real estate for instance. Yet there's a there's a concept in the tax rules called 10:31 exchange that people may have heard of. It has a lot of requirements in terms of time periods that you have to do things but the basic concept behind that is that if you have property that's held in trade or business or for investment so non residential property there seems to be some confusion

that possibly you can do this type of exchange with with residential property but that's that's not available to us to be some sort of investment for your business or yes or trade or business property that you can take that property and as long as you don't receive the funds from the sale of the property. Again that concept of once you've got the money you've got it. But if you use a qualified intermediary or if you actually just do an exchange of real property for real property the concept is that it is a like kind exchange so if you exchange property that is like kind of an other property and for tax purposes all real property is like kind with other real property. So a condo is like kind with raw land. So as long as it's real property it's like kind of each other. The concept there of course is that you are still invested in real property you can't cash out that investment. In order to get the to get the deferral you have to exchange the property for other property and usually you have to exchange up. And that's that's the issue you have to buy the replacement property that you're buying has to be the same or more than what you're selling and for some people if they decide to get out of the business and not

not continue to invest in real estate that's a major consideration getting back to what Steve said with capital gains being at 15 percent. You know maybe now's not a bad time to cash out pay the tax at the lowest rating assuming they've held the property for a year to qualify for the 15 percent. Maybe that's their best options are really it's a matter of looking at what their objective is in in terms of whether they want to stay in in the real estate or or just cash out. Well what happens ultimately if you do one of these 10:31 real estate exchanges and I think they're probably a lot of people out there who had profits that they've accumulated real estate deferred them by doing 10:31 exchange. Do they ever actually have to pay this tax is eventually come Tuesday or whenever that last property is sold. And the downside to that in comparison to occur all is you pay the capital gains at that year's tax rate. It could be 20 30 40 percent capital gains. So you have to make a decision on that pay 15 percent now that you know about what percentage you might pay five or 10 years into. You do not know.

Gotcha. Well let's shift gears slightly we've talked about a lot of different items there to help us lower taxes let's talk about charitable giving contributions. In addition to doing good with charitable contribution contributions you can also do good things for yourself from a tax standpoint. How can one lower one's taxes through charitable giving estate. Well the benefits really fall into three primary areas in the first being that you get an immediate tax deduction. The second being if you use appreciated assets there there is some benefits there. And in Alaska there's a state tax benefits that once you remove the asset out of your state there's some potential savings. Once you pass away. So that's the primary areas. There is actually a fourth area that a lot of people don't think about and that's where you can actually do things in order to help a not for profit that actually return you an income. And that's that's through things like charitable remainder trusts charitable gift annuities. There's all sorts of vehicles that you can actually use that provide all of those first three benefits I talked about. Plus the third being an income. Back

to you. While charitable giving plays a big role in this country I think a lot of people don't realize it but as we discussed it may be one of the most effective ways of reducing income taxes. You can also lower estate taxes and at the same time you do great things to help the community and now here's a brief overview of philanthropy in America. Did you know the total giving in the U.S. in 2005 was two hundred sixty billion dollars. That's actually a six percent increase from the year before. If you'd like to know how that 260 billion dollars breaks down Here's a snapshot of who gave what individuals by far the biggest givers accounting for more than three quarters of the total foundations are next with one eighth of the total followed by bequests that people put in their wills when they die and then comes corporate donations at around 5 percent. Now where does all that money go. Well the biggest recipient of philanthropy in America is

religious institutions getting more than a third of the total funds. Next is education. With 15 percent human services health and foundations all receive close to the same amount of money. Arts and cultural institutions get around 5 percent. As a general social welfare organizations and followed by environmental and animal rights causes. All right so that's what happens in America right now with philanthropic giving. Now how about donating appreciated assets like stocks bonds mutual funds What's the best way for an individual to actually give those assets to charities state. Well what we want for our clients is to make the donation of the appreciated stock because it's it helps them with two items. One they get the the tax write off of the charity donation at the value current day value of that item. Plus they do not have to pay tax on the appreciation. So you're saving income tax and you're getting a tax write off. Get two for doing one good thing to the community.

It's a great idea Steve. Well we have a perfect example we're working with a client that owned a large company a dividend paying company but was paying about a 2 percent dividend. They had bought the stock many many years ago and had a very low cost basis. So they really couldn't sell it because of the potential capital gain. Well by donating that stock directly to the charitable organization and having the organization sell it and in this case actually by a charitable gift annuity they were actually able to increase their income from 2 percent a year to over three and a half percent a year and get all sorts of benefits from a tax standpoint as well. They were able to actually generate a immediate tax deduction and then part of that increase to their income was actually tax free because charitable gift annuity is the way they're structured provide potentially almost all of the income on a tax free basis for a good percentage of it and then income was for a lifetime so they were able to actually accomplish a variety of issues by using that approach. We're talking about assets right now that people are donating to charities that they own outright they were to pay the tax for them they bought them with after tax dollars and so forth. But

a lot of people have a significant amount of their money or their wealth tied up in IRAs and 401 k accounts and other qualified retirement plans. Is there some way to give money to charity. Using an IRA or retirement account. Yes actually there is a a new law that was just passed this year that that deal specifically with the tremendous benefit to persons who are 70 and a half or older to use their IRA to make a direct contribution from the IRA to their charity. And it does have to be a public charity and then revise funds will not work in this case but they have to be the deduction has been or the country has made directly from the IRA to the charity in order to count it can't go through the individual taxpayer and you can do that up to a hundred thousand dollars so that's a very large contribution. And that hundred thousand dollars counts towards your maximum toward a minimum distribution requirement for the year. And I know that Steve has had some issues with compliance.

What's happening is the laws just passed in August and in fact it's effective this year and it gets back to what we talked about earlier how certain rules are effective this and next. Well this is one of those rules it's effective in 2006 and 2007 and I guess beyond that we'll see. So a lot of the Custodians In other words the investment firms that are holding these IRAs are having to scramble here year round because it's effective this year. And the key issue is that if you decide to make a donation of your IRA distribution it has to be done pretty much two or three weeks before the end of the year because that money as Kristen said has to go directly to the organization. A lot of the custodians and the and vestment companies are saying they don't want to be the ones responsible for that so they'll cut the check payable to your favorite charitable organization but they're pretty much going to send it to the owner. And that is going to be up to the owner to get it to the charitable organization before year and year end. So this is a very powerful tool for somebody that's over 70 and a half who might not be itemizing. And in the past was making donations to charitable organizations

and receiving no tax benefit. This is a way they can get a great benefit but it's going to be something that you have to get on right away and start working with your investment advisors or tax advisors to begin the process early on and not wait to December thirty first to try to get something like this done. Well keep in the same topics these banks why would somebody want to give money from the IRA to charity. What's the benefit. Well the benefit is the especially if you notice it. The point was here they had to be over 70 and a half. So you're talking to the people who have to make required minimum distributions. They're having to pull something out of the IRA anyway. So take what you have to pull out. If you give it to charity it does not come in as income to you. So your adjusted gross income goes down which if you itemize that means your itemized deductions go up because you don't have the phase out rules that reduce your deductions. You do not get a charitable donation for this but you don't get it as income. So you come out ahead because of saving the phaseout rules.

Best way to think of it is you're not going to get a 10 99. So whatever money's donated we had you know of this don't tell anyone generated so and you can do good again while helping yourself. But the key here I think is only for two years in the law currently. Well how about appreciative assets we've been talking about financial assets stocks bonds mutual funds things and IRAs. We've talked about real estate but not donating real estate we talked about selling it in avoiding taxes there. What if someone has appreciated assets they may have a piece of property or other tangible asset that they would like to donate to straight to charity What's the most effective way of doing that. Well there again donating appreciated property to a charity is a good way to to contribute to charity allow them to to use that asset However there are significant limitations when you're doing that that you are make sure you comply with if there is a long term capital gain associated with property that you can contribute to fair market value and get the get the deduction for it however there are some limitations to how much of your adjusted gross income then you are then going to be allowed to take

it ordinarily it's a 50 percent limit for most public charities and some private foundations. However if you take a full fair market value it's going to be lowered to 30 percent for other types of of appreciated property that's not long term capital gain. You're going to be reduced to your basis essentially what you paid for the asset. So there in addition to those complications there are a lot of substantiation requirements in the rules and some new ones actually in the new Pension Protection Act that taxpayers going have to comply with that used to be sufficient for tax payers to keep records to substantiate their deductions and now there are actually requirements and recent years to attach appraisals. If there's appreciates there is contributions of property that exceed $5000 and there is a form that you have to attach if you contribute property that's worth more than $500. In addition to the receipts and such that you have to maintain if you contribute cash or property in excess of $250. If there are a lot of record

keeping requirements. A lot of moving parts and even your opinion is it still worth it if someone has appreciated a tangible asset. Certainly I mean there's a tremendous benefit but I think as Kristen saying it's important to work with professionals and work with your advisors and in fact work with the charm organization. You know they're a great resource for providing. The mechanics behind how a gift like that takes place. It's important consider the investment policy of the gift acceptance policy of the organization. You know often people say well I've got a piece of real estate I'd like to donate to an organization. Well they don't check with the organization first and that's really the first step early on and working with both your professionals and the professionals that are at the organization that you're looking to benefit. And I'd like to add one thing you have to be really careful here if you're giving your a donation large because donations do have a life. If you can't deduct this in the year of donation plus five years you lose the write off. So there is a limitation on this you have to be careful about that on the large donations in terms of donations some people don't necessarily have a list of charitable

organizations that they'd like to give to they may be philanthropic Lee inclined but they want to put the money into a charitable arm but they don't know where to do to do it. And that's where foundations come in they were donor advised funds isn't that right Steve. Sure. They had the donor advised funds are a great way in fact out of the 260 billion that's annually donated. About 12 billion is directed towards donor advice funds so you can see and in relation to the big screen the grand scheme of things it's relatively small but very rapidly growing field donor advised funds basically allow a person to set up a private. Count in essence where they can actually put money in and their family's name or their name and direct gifts from this account on an annual basis. So getting back to the person that may have a large capital gain this year that isn't sure what charity they might want to benefit this year. They can actually set up a donor device fund then these are done through institutions like Charles Schwab or Fidelity where they actually can set up an account or Community Foundation or community foundations Exactly. There are some differences community

foundations are more public whereas a donor advised fund is more private for people that want to remain more private and they can actually make that donation all in one year or so for a person that might say I'd like to donate $10000 over the next 10 years. They can actually make $100000 donor advised fund set up this year get the entire tax deduction this year the investments invested so they can actually direct how the monies placed in different investments what actually earns interest. And then each year they can make a decision in terms of what charities they want to benefit and they could do it over a period of time. Now they could just donate the interest from it if they choose to and make it a lifetime gift. So there's some tremendous advantages and the great difference between a private foundation or setting up a foundation for oneself or donor advised on the expenses of the complications when you get into a private foundation. Obviously a lot more complex. But for people that have very large donations that they'd like to make that make it certainly makes sense.

We have about one minute left Steve I'd like to ask you if if someone is interested in being philanthropic how should they look at their personal finances and determine if and how this is right for them. I think it's a personal choice very personal one and do they have the desire to help an organization. Second can they afford it. And third What's he going to do either through their taxes they need to look at those three factors and weigh them and say OK this is the organization I want to help. And this is the amount that I want to help in this year. Absolutely. Well as we've seen there are there are thousands if not millions of people in this country who have decided to be philanthropic 260 billion dollars in 2005 alone and I believe the number is even rising this year so there's a lot of people inclined to do so. I want to thank all three of you for being our guests and for sharing all this information both about charitable giving and about tax planning with our audience thanks for being guests on Suncoast business form. Now if you have any questions for our guests or me please e-mail us at S. B F at W. edu dot org.

Every office has one that chatterbox that concept but no office ever had a man right. She lets me use it. You name it she got 48 hours. Pretty soft stuff yeah. Oh.

If you could cut thousands of dollars from your income tax bill wouldn't you do it. If you could target your charitable dollars to get more bang for your buck. Wouldn't you do it. Well there's a panel of tax and financial experts who can help you do just that. But I'd like you to meet them on the next Suncoast business for you.