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Monthly Archives: September 2015

Get the monkey off your back!

Medical School Loan Repayment

The following article is provided by Brandon Barfield, Co-Founder and Regional Director of Doctors Without Quarters, LLC. Student loan related services are provided by Doctors Without Quarters, LLC, an affiliate of Larson Financial Group, LLC.

“Cash flow and debt management are intimately linked facets of a successful financial life for doctors. Debt is incredibly powerful. It can be leveraged to provide opportunities that cash flow would never provide, such as a dream home, and it can also devastate families through the stress it causes when payments cannot be met. As such, debt is a tool that should always be used cautiously.

Physician Mortgage Loans

If not, it can easily and quickly become a monkey that is impossible to get off of your back. It is important to note that while paying off debt quickly is often a positive decision, it should be balanced with achieving your other financial goals. We would be concerned if clients devoted the next ten years of their life to paying off debt at the direct expense of setting aside any savings for the future. Because cash flow is a limited resource, it is imperative that your family makes a strategic decision when determining how much of your income to allocate toward debt reduction versus savings.

Consumer Debt

When we refer to consumer debt, we are referring to loans outside of mortgages and student loans. Of these loans, the most problematic are certainly credit cards. This is the ultimate monkey. We have encountered physicians with as many as twenty-three credit cards. People often assume that they should pay off the cards in order of the highest to lowest interest rates. Instead, we often suggest a different approach. Rather than paying down the cards with the highest interest rates first, we often recommend that our clients focus on the cards that can be paid off the quickest.

Eliminating credit cards in this manner creates what we call the “snowball effect.” You gain more and more momentum along the way, until all of your credit cards have been eliminated. This approach actually decreases the amount of interest being paid in many circumstances, and psychologically it works better because the progress is visible. A final key to success is to begin saving the funds that are no longer required for debt payments once the target debts are fully eliminated.

Often, an even better approach to credit card elimination is a consolidation loan. By reducing the debts from many to one, the debt can often become more manageable. As long as new habits are established in conjunction with this strategy, this may be the most practical route to reducing the stress surrounding debts. The United States is still suffering through the economic after effects of the “great mortgage meltdown.” Banks have tightened up lending and lines of credit, but some great resources are still available for doctors. Just remember, it is more important than ever to maintain a clean credit report.

Student Loans

Most young physicians have substantial student loans. Our record loan to date belonged to one young couple that had over $680,000 in combined student loans. Although these loans can feel like a heavy burden, if your education has led to the opportunity for substantially higher-than average income in a career that you enjoy, it was a great decision.

Medical School Loan Repayment

When we asked one young physician how he felt about his student loans (with only a 1.6% interest rate), he responded, “They scare me to death!” Because the detailed intricacies of exactly how to structure your individual student loans are beyond the scope of this article, we thought it important to point out the basics that every indebted doctor and dentist should know about medical school loan repayment.”

Student Loan Fundamentals:

  • Review how your loan portfolio is structured. If you have FFEL, Perkins, HPSL or LDS loans, consider consolidating these over to the Direct Loan Program. The latest federal repayment and forgiveness programs are only available for direct loans.
  • If you have all direct loans, determine if consolidating is the best move. Consolidating can simplify your portfolio and complement an income-driven repayment or loan forgiveness strategy. On the other hand, not consolidating gives you the ability to target which loans you want to pay off first. Paying off higher rate loans first will cost you less money than paying on everything at once over a period of time.
  • Be sure you understand how the income driven repayment plans (IDR’s) work. These programs provide substantial payment reductions during training, carry various interest subsidies / reductions, have their own loan forgiveness benefits, and qualify as accepted payment towards PSLF.
  • Be sure you understand how the Public Service Loan Forgiveness program works. Many physicians work in the public service sector and do not realize it. Others think they are working their way toward loan forgiveness, but have not properly structured their portfolio.
  • Consider refinancing private loans during training, or all loans post-training. Today’s market rates are significantly lower than the rates most physicians have on their federal loans taken out after 2006. Refinancing can significantly reduce the long-term interest costs.
  • Residents with over $100k in student loans will usually benefit from strategic utilization of IDR plans and PSLF positioning. Residents transitioning to practice, along with other practicing physicians in the for-profit sector, can often save money by refinancing.

Note: This issue is usually no longer a factor upon graduation as your income should be too high to deduct the student loan interest anyway.

Physician Mortgage Loans

“Most physicians have four main questions regarding their mortgages:

  1. How much home can we afford?
  2. How much money should we put down?
  3. How should we structure our mortgage?
  4. Now that we have enough money, should we pay off our home, or keep our money invested instead?

An Affordable Home

To address the first issue, note that outside of divorce and lawsuits, little else can be as financially crippling to a physician as buying a home that is too expensive. Families in Phases I and II should avoid having a mortgage any larger than one to two times their annual income. However, this amount is considerably less than a lender will likely offer you for a mortgage. In other words, a bank’s pre-approval does not always equal a wise financial decision.

Down Payment

With the mortgage market in such flux over the past couple of years, physicians are asking more and more, “How much money should we have for a down payment?” Our short answer is that this is the wrong question. It goes back to the affordability issues described above. Provided your home meets the criteria suggested, it should not matter whether you put 5% or 50% down.

The only caveat is you might receive a lower interest rate by putting more money down. Going this route might make sense at times, but this issue has to be addressed on a case-by-case basis by evaluating these elements: cash flow, emergency reserves, asset protection issues, return on other investments, psychological attitude toward debt, other debts, propensity for risk, and other variables. In other words, an advisor’s advice is well warranted for this issue because it is more complex than simply acquiring a slightly lower mortgage rate.

Paying Off Your Home

At the other end of the spectrum, many of our doctors are in a position where they could liquidate their investments and pay off their homes, if they so desired. They often ask what their best course of action is in this respect. Our answer: It is a function of three elements working closely together:

  1. Client Economics
  2. Psychology
  3. Asset Protection

First, consider the economic component, as this is the easiest part. If you can earn a higher net return on your invested dollars than your mortgage is costing you (on a net-of-tax basis), why pay off the mortgage? This is especially true if you can accomplish this with the market risk involved.

However, in addition to economics, we realize that psychology is always involved with debt. No client has suggested that they love debt, and wish they had as much of it as possible. Even though the economic and protection factors may suggest that maintaining a mortgage makes the most sense, if it will cause you to lose sleep, we suggest you pay it off.

Finally, because people can become so emotionally attached to their homes, asset protection must be considered in the decision-making process. Some states, like Iowa and Florida, provide unlimited asset protection for home equity, which makes it very difficult to lose your home in a lawsuit or bankruptcy in these states.(3) Along similar lines, Texas provides unlimited asset protection, but only if the property is less than one hundred acres.(4) What a great law that only Texas would have. (5) However, other states like Missouri, Indiana, Michigan, Tennessee, Colorado, California, and Ohio provide very little protection of home equity. (5) (6) If you live in such a state, maintaining a mortgage can actually help reduce the risk of losing your property in the event of a lawsuit. Understanding how your state treats home equity, from an asset protection standpoint, is an important variable in choosing the best physician mortgage loans.”

Have Questions?

References:

(1) Bureau, U.S. Census. U.S. Census Web Site. [Online] [Cited: 2011 8-June.] http://www.census.gov.
(2) Kirwan, J.D., LL.M. Adam O. The Asset Protection Guide for Florida Physicians: The Ultimate Guide to Protecting Your Wealth in Difficult Economic Times. Orlando, FL : The Kirwan Law Firm, Updated and Revised for 2010.
(3) 10 acres for urban areas, 100 acres for rural areas.
(4) Adkisson, Jay D. and Riser, Christopher M. Creditor-Debtor State Exemption Chart. Asset Protection Book. [Online] [Cited: 2011 8-June.] http://www.creditorexemption.com.
(5) Riser, Christopher M. and Adkisson, Jay D. Asset Protection: Concepts and Strategies for Protecting Your Wealth. New York, NY : McGraw-Hill, 2004.

Advisory services offered through Larson Financial Group, LLC, a Registered Investment Advisor. Securities offered through Larson Financial Securities, LLC, member FINRA/SIPC.

Larson Financial Group, LLC, Larson Financial Securities, LLC and their representatives do not provide tax advice or services. Please consult the appropriate professional regarding your tax planning needs.

The information provided is for informational purposes only and should not be construed as a recommendation or advice. Further, this is not an offer to buy or sell securities or other products and services of Larson Financial Group or its affiliates Please consult an appropriate investment professional regarding your specific needs.

A Widow’s Worst Nightmare

Financial Planning for Physicians

What can be worse than losing a spouse—especially when there are still young children to raise? How about being forced to go through probate and losing needed assets to ex-spouses and estranged family members?

If only there had been a will.

Physician Financial Advisor

Advisors are used to beating the drum about proper estate planning and predictably, year after year, the same physician clients will give an awkward laugh and sheepishly admit that they still haven’t made a will. It just doesn’t seem that important. Dead is dead, right? And besides, all the assets will go to the physician’s spouse, so he or she can worry about passing it on to the kids.

If only that were true.

When a physician dies without a will, the law of the state they died in determines how assets will be dispersed. Distribution formulas vary according to state law, but they are usually some variation of the following:

  • The physician’s spouse gets everything if the deceased had no children, parents, siblings, nieces, nephews, or there are no children of a deceased child.
  • The physician’s spouse gets half if the deceased had one child or there are children of one deceased child.
  • The physician’s spouse gets one third if there are two or more children or one child and descendants of one or more deceased children.

Within weeks of each other, two young widows came through our doors seeking financial advice. Their physician husbands died suddenly without wills, and now they’re facing the grim reality that the assets in the husband’s name will not all pass to them.

The widow from Maryland discovered that she’s entitled to one half of the net probate estate, and her minor child will get the rest. The widow from Virginia will receive only one third of the probate estate, and her children and stepchildren are getting the rest. In both cases, the majority of the financial assets were in brokerage accounts in their husbands’ names.

A Widow’s Worst Nightmare

These widows have some serious problems, as their outright shares of the assets are insufficient to maintain their lifestyle and support their children. Additionally, both face ongoing and cumbersome reporting requirements to their county commissioners, not to mention legal and bonding expenses as they manage assets belonging to their children under court supervision. In the case of the widow with minor stepchildren, it remains to be seen whether the court will appoint her or the ex-wife as conservator of that child’s account.

We often counsel clients who are widowed to try to wait several months before making large financial decisions. But if money is tight and the courts are involved, time is of the essence. The first hurdle is probate. The court determines how to divide the assets—what goes to which beneficiary. The costs can add up quickly and may include court fees, attorney fees, accounting fees, appraisal fees, and business valuation fees.

When minor children inherit, the bureaucratic red tape begins and costs can be excessive in comparison to the value of the assets that are being protected. It can be a constant struggle to access the children’s inheritance for their own upbringing. Interaction with the courts occurs in the following ways:

  • The court appoints a conservator to administer the assets in accordance with its rules. This conservator will not necessarily be the surviving parent.
  • Court supervision involves formal accountings, which can be costly and complicated.
  • The conservator may also require legal representation in court.
  • The court controls how funds are to be used and when they can be withdrawn.
  • The court’s interpretation of reasonable costs for health, education, maintenance, and support is usually very conservative. A parent may be unsuccessful arguing that tutors, orthodontia, music lessons, sports camp, or help paying a mortgage is a necessity. It may be hard to justify using a larger share of the assets for a child with special needs.

What happens when the children are no longer minors?

Children gain full control of their assets at the age of majority, and this can have tragic consequences. Few 18-year-olds are emotionally and financially responsible enough to handle a large inheritance. This sets the stage for a lifetime of regrets if the children spend through all the assets. They may even become injured by an excessive life style due the toxic combination of immaturity and sudden wealth. This is not a great legacy for any parent to leave their child.

At a minimum, parents need to establish wills to protect their spouses and their children. Physical guardians should be designated for any minor child, and any assets that might pass to a minor should be titled to a named custodian under the Uniform Trust for Minors Act (UTMA) or as a trustee for a minor’s trust. The guardian and trustee do not need to be the same person, and separating the guardian of the children from the “conservator” of the financial resources is often a very good idea.

Provisions can be made so that the guardian will receive sufficient funds to raise the children without creating an unreasonable burden on their own family and resources. A thoughtful will can also be structured to allow gradual distribution of assets at ages older than 18 or 21.

Our two widows would have been spared all these problems if their husbands had even simple “I love you” wills naming them as the beneficiary of all the separate property. And don’t forget, they each need to draft a will now to prevent this from happening all over again if they should experience a loss of capacity or a premature death.

Physician Financial Advisors

Check with your financial advisor for the name of a good estate attorney. Financial advisors and estate planning attorneys often work together to ensure their clients’ estates are financially and legally protected.

And the next time you procrastinate on creating a will, remember the stories of the two young widows now struggling to support their children with far less in assets than they expected or their husbands intended. It can be a nightmare working through the courts for support and maintenance of the children. A proper will is a true act of love and generosity and is absolutely critical in situations where the spouses have separately titled property.

Above all, remember that if you don’t create a will of your own, the state will write one for you. Knowing how probate really works work might be all the incentive you need to visit that nice lawyer and create a will that can enforce your last wishes and protect your family’s assets.

Copyright © 2013 by Horsesmouth, LLC. All Rights Reserved

Have Questions?

An Overview of Asset Transfer Strategies

A physician may need to transfer assets for all sorts of reasons. A working knowledge of various transfer techniques can help them determine when it’s appropriate to move money around, and how to manage the tax and legal implications of the process.

Asset transfers are an important part of financial planning. As a physician moves through life, they are constantly acquiring and disposing of assets until that final transfer takes place—the one they’re not around to see.

Tax Deductions for Doctors

Some asset transfers are initiated as a result of a life event or other major decision. Others are suggested by attorneys or financial advisors as a way to better arrange a physician’s financial affairs. Some asset transfers are as easy as handing a tangible item over to another individual. Others are fraught with legalities and should not be attempted without counsel.

Here is an overview of asset transfers—the tip of the iceberg, if you will. Many of the regulations governing asset transfers are state laws, so your best bet is to check with your financial advisor and a good attorney—several of them, actually, in different specialties—who can guide you through the transfer process.

Why assets move

There are lots of reasons why people transfer assets. Here are some of them.

  • Marriage or cohabitation. You want to put a new spouse or partner’s name on the title.
  • Divorce. A couple wants to divide joint property between the two spouses and re-title it in separate names.
  • Buyout (or sale to) co-owner. One of two co-owners wants to own full rights to the asset.
  • Anticipation of incapacity or death. An elderly person wants to put a son or daughter on the title for ease of transfer.
  • Establishment of a trust. There are many reasons for forming a trust; assets must be retitled in order to be transferred into the trust.
  • Establishment of a private annuity. You need income and want to keep assets in the family; assets are sold to family members in exchange for regular payments.
  • Reduction of estate taxes. You may want to remove assets from your estate in order to reduce the amount subject to estate tax.
  • Reduction of income taxes. You may want to transfer assets to a low-bracket family member so investment earnings will be taxed at a lower rate.
  • Medicaid eligibility. You may want to reduce the amount of “countable assets” so that Medicaid will pay for nursing home care.
  • Bankruptcy. You may need to meet the state’s asset requirement laws in order to discharge debts or other obligations.
  • Anticipation of lawsuits. You might need to protect assets from judgments (applicable to people in high-risk occupations, such as surgeons).
  • Gifting. You may want to gift securities or other property to an individual or to charity.
  • Cash or asset exchange. You may want to sell an asset for cash and/or buy a different asset.

Tax and legal considerations

It would seem that if an individual wants to get rid of an asset or if two individuals want to enter into a private transaction, they ought to be able to do it without tripping over a bunch of laws. For smaller transactions, they can. For instance, gift giving at birthdays and holidays would normally be exempt from asset-transfer laws.

In some transfer situations, however, there’s opportunity for tax evasion, taking advantage of people, or exploiting laws that are designed to help the needy. In those cases, certain procedures must be followed. And to make sure they are, the transfer process itself—the physical transfer of title to another person—may be extremely complex and not possible to complete without the help of an attorney, escrow officer, transfer agent, or other intermediary.

Even so, the intermediary arranging for the transfer may not be obligated to warn clients of the various tax and legal ramifications— in some cases he or she may simply be following instructions to transfer title—so it is up to you to know the law—or obtain legal counsel.

Here are a few of the common considerations involved in asset transfers:

Gift tax

If you are thinking about transferring assets to family members to save income or estate taxes or to facilitate transfer later on should be aware of gift tax rules. In 2013, any gift to an individual that exceeds $14,000 for the year ($28,000 for joint gifts by married couples) applies against the lifetime gift tax exclusion and requires the filing of Form 709  for the year in which the gift was made. The gift tax does not need to be paid at the time Form 709 is filed, however, unless the client has exceeded the lifetime gift tax exclusion of $5.25 million in 2013 (adjusted annually for inflation).

The annual gift tax exclusion—the amount that may be given away without eating into the lifetime exclusion—is adjusted for inflation in $1,000 increments. Transfers to spouses who are U.S. citizens and to charitable organizations are exempt from gift tax. Payments made directly to an educational or health care institution are also exempt from gift tax. Property exchanged for equivalent value (as in a sale to another party) is not subject to gift tax. However, low-interest loans to family members may be subject to gift tax. Complicated transactions like these require the advice of an attorney or tax advisor.

Kiddie tax

The practice of transferring assets to children to avoid income tax on investment earnings is less popular now, because for 2013 investment income exceeding $1,900 earned by qualified children is taxed at the parents’ rate. The first $950 is tax free, the next $950 is taxed at the child’s rate, and the remaining income is taxable to the parents. The kiddie tax is also subject to inflation adjustments in $50 increments. It’s certainly possible to get  around the kiddie tax by investing in assets that don’t pay current income—but then what’s the point of transferring assets to children, especially when parents must think about funding college.

Financial aid

The formula that determines need-based aid factors is a much higher percentage of assets when they belong to children (35%) as opposed to parents (5.6%). So the classic financial aid strategy is to keep assets away from children and stash parents’ assets in retirement plans, home equity, and other exempt assets.

What if a child already has significant assets—say, in an UGMA or UTMA account? Is there any way to get them out of the child’s name? Probably not (check with an attorney to be sure), at least not until the child turns 18 or 21 and has the legal authority to transfer property. But by then it may be too late for financial aid, since schools look at the family’s financial picture as early as the student’s junior year of high school. Any parent who wants to maintain maximum financial aid flexibility (and this includes need-based scholarships, not just loans) should think twice before transferring assets to children.

Medicaid

Medicaid is designed for people with few assets who can’t afford to pay for custodial care. In the past, people had to “spend down” to such small amounts that often the healthy spouse was left nearly destitute. This led to rampant asset transfers and big business in “Medicaid planning.” However, the laws have been liberalized in recent years to better protect the healthy spouse, so asset-transfer gimmicks have waned somewhat. In any case, clients contemplating asset transfers in anticipation of applying for Medicaid need to be aware of “look back” laws—60 months for transfers to individuals (with some exceptions if the transfer is to a child under 21 or a child of any age who is blind or disabled) and trusts.

Bankruptcy

Each state has its own laws relating to how much property a client can keep and still  discharge debts in bankruptcy. These laws also address property transfers in which it appears that the debtor is trying to pull a fast one.

Popular asset-transfer strategies

The main point to understand is that asset transfers may not be as straightforward as you think, and some transfers may have unintended consequences. At the same time, strategies you may not have considered could provide the perfect financial planning tools.

Popular alternatives include:

  • Annual gifting. Every year, give cash or property equal to that year’s gift tax exclusion to each child, grandchild, or any prospective heir to remove assets from the estate.
  • Transferring assets to parents. If you are supporting elderly parents you may want to transfer assets to low-bracket parents who would pay taxes on the income being used for their support.
  • Writing checks directly to educational institutions. Grandparents who are paying for their grandchildren’s education should pay the school directly; during the accumulation phase they should contribute to a 529 plan rather than an UGMA.
  • Trusts and other advanced strategies. There’s no substitute for consulting with an estate planning attorney and tax advisor for individual advice regarding asset transfers that can accomplish specific objectives.

Have Questions?

Larson Financial Group, LLC, Larson Financial Securities, LLC and their representatives do not provide legal or tax advice or services. Please consult the appropriate professional regarding your legal or tax planning needs.

It Takes a Family to Plan Retirement

Let clients know financial planning is not a solo project for retirees—annual family meetings can ease the transition into senior status.

It is no secret that we have an aging population: Each day 10,000 baby boomers turn 65 and start collecting Social Security and Medicare benefits. This trend is expected to continue for the next 19 years.

Physician Retirement Planning

However, what’s less well known is that the vast majority of retirees are underfunded for retirement. The reasons for being underfunded are many: lack of savings, poor investment choices, excessive spending, or unforeseen expenses.

No matter what the cause, it is becoming clear that neither they nor we can rely on the federal government to take ample care of our senior citizens.

In fact, it truly does take a family to care for their elders, and we are seeing more and more situations where children are pitching in to help out parents with both care and financial support.

To facilitate this, having annual family financial meetings is a critical yet simple step that can help a family find the best available solutions for their finances. Every situation is slightly different, of course, but we see two specific areas that seem common to most situations where it pays to be proactive in getting all members of the family on board, before a crisis hits.

The key areas to discuss are long-term care and real estate, because they are two areas that often cause the most significant pressure on the next generation of a family.

One of the biggest financial burdens of a retiree is long-term care, which can run around $100,000 a year with an average stay of three years. Who is going to foot the bill? Who is going to manage the parents’ transition into a nursing home? With the right planning, the next generation can provide the care needed without a slew of sudden emergency expenses.

As a part of the family planning process, options for long-term care insurance should be investigated. Traditional long-term care insurance is a use-it-or-lose-it type of insurance policy with premiums that are inexpensive relative to the benefit amount. Another option is a life insurance policy with long-term care benefits, in which case you will use the long-term care insurance for elderly needs or a loved one will receive a death benefit upon your passing.

Thinking about long-term care needs today can save you both dollars and heartbreak and/or financial discomfort in the long run.

Next is real estate: Who is going to be responsible for the care and disposition of the family home? What is the plan for the succession of the family vacation home? Who will take care of the maintenance, upkeep, and taxes from year to year? Who will take the tax deductions and/or rental income, if any?

Real estate can be part of a family’s financial solutions since it can be leveraged to help out the underfunded retiree. This could take several forms, but one is by having a working child move in and do a buyout of the home, and another is a reverse mortgage.

Of course, these are idealized solutions. In real life, there are usually more complications, especially when more children and grandchildren are involved.

Often the party that does not want his or her parent to give up the family home is not the party that is dealing with the day-to-day care issues. Similarly with vacation homes, it’s sometimes the side that frames the issue in terms of memories, nostalgia, and emotion that is the least able to step up and take on the responsibilities in terms of finances and time commitment.

All of these issues can be dealt with in advance of an emergency, a time that forces the issue and heightens the emotions.

When trying to set up an advance meeting, communicate that the goal is to get to a win-win solution for everyone: to provide financial relief and liquidity to the retiree and give all adult children an opportunity to weigh the pros and cons of various solutions.

Too often we see people think only in terms of potential inheritance, forgetting about the potential expenses for their parents or conflict within the family that can arise. For all of these reasons and more, it is important for families to sit down and develop a plan while everyone can be at the table in a relatively calm and unstressed condition, before it is too late.

Have Questions?

Copyright © 2013 by Horsesmouth, LLC. All Rights Reserved

Get Into the Spirit of Giving (and Reap the Tax Benefits)

December is a popular time of year for reflection. Another year has run its course, and the holidays allow us to the opportunity to spend time with loved ones while remembering those who are less fortunate. It’s no surprise that donations to charitable organizations tend to spike at the end of the year.

Tax Deductions for Doctors

There’s still time, advocates of non-profit organizations say, to make a year-end donation that’s eligible for a tax deduction. In addition to being altruistic, seasonal generosity can be a favorable strategy when you’re preparing your tax return. Fortunately, once you’ve found a cause dear to your heart there are numerous resources online where you can do your due diligence in verifying the charity’s fiscal health and transparent governance.

Founded in 2002, charitynavigator.org helps donors evaluate where and how to spend their money. Charitable organizations are rated, allowing you to make sure your hard earned dollars are going to a good cause by avoiding charities that might misuse donations. Once a donation is made, there’s not much recourse for the donor if the organization turns out to be unethical or generally unwise with its decisions. Guidestar.org is another useful resource for researching and evaluating charities.

Methods of Donating

In addition to a standard cash donation, real estate and precious items such as jewelry, art and antiques can be deducted when donated to an eligible organization. However, steps must be taken to properly appraise and asses their fair market value. When estimating the value of donated property, it’s best to err on the conservative side since the IRS will penalize taxpayers for overstating the value of donated property. If you’re claiming a deduction of more than $5,000, the IRS mandates completing Form 8283, Section B.

Another donation strategy that we advocate is to donate investments to a charity instead of cash. If you donate stocks and/or bonds that have appreciated to a qualified charity, you can take a deduction on the appreciated value of those assets rather than their basis. Use the price on the date of the sale, averaging the high and low price to get the fair market value.

Charities are allowed to sell investments tax-free, even if there’s a substantial gain. Furthermore, you can repurchase the exact same investments with cash. Not only do you receive a deduction for the full amount of the investments that you gifted to the charity, but you also pay less taxes when you ultimately withdraw your cash that has been reinvested, so it’s pretty much a win-win.

Eligibility Requirements

Before donating, it’s imperative to make sure that an organization is a qualified charity under IRS rules. These include corporations, trusts, community organizations, funds or foundations organized and operated in the United States for religious, charitable, scientific, literary, or educational purposes. Other qualified charities include cemetery companies, veterans’ organizations, fraternal organizations and organizations designed to prevent cruelty toward children or animals.

Certain charities in Canada, Mexico and Israel may also qualify. You can search for qualified charities using the IRS’s online search tool. The IRS prohibits charitable contribution donations for money or property given to political candidates for public office and groups that lobby for legal changes. Labor unions, chambers of commerce, Homeowner’s associations and for-profit organizations are also not eligible.

Finally, remember to save all receipts and document when possible. No deduction is allowed for a separate contribution of $250 or more unless you have written confirmation from the charity. When donating paintings, antiques or objects of art worth $20,000 or more, a signed appraisal must be attached to your tax return, and the IRS may request an 8” X 10” color photo of the donated item. Just to be safe, you should keep records of your donations in the form of a cancelled check, credit card statement or a written acknowledgement from the charity. When in doubt, check with your financial advisor for rules specific to your situation.

Have Questions?

The above article is for general informational purposes only and should not be construed as tax advice. You should consult with a professional advisor familiar with your particular factual situation for advice concerning specific tax matters before making any decisions.