Every year thousands of generous people leave a part of their final estate to worthy charities, leaving a legacy that will continue to help others after they have passed. Having taken care of their families, these Good Samaritans also help those less fortunate and in need of help and care.

But what if there were a way to be generous and receive a benefit while still living? There is—it’s an old estate planning tool called a Charitable Remainder Trust.

A Charitable Remainder Trust (CRT) is an irrevocable trust that pays the grantor or heirs an income for a specified period of time, with any remaining balance going to one or more qualified charities. A CRT can be funded with cash, stocks, bonds, real estate, private company interests, and non-traded stock. The trust retains a carry-over basis for all assets donated to the trust and the remainder cannot be less than 10% of net fair market value of the assets donated to trust. Additionally, the time period is limited to 20 years or the life of one or more of the non-charitable beneficiaries.

For their future generosity, the grantor receives a current tax-year charitable deduction that is based on the IRS section 7520 interest rate, among other factors. The interest rate used to calculate the remainder value is based on the rate in effect in the month the trust is funded. Generally, the higher the interest rate, the higher the charitable deduction created by a CRT. As interest rates have moved up, so has the IRS section 7520 interest rate, and thus has the remainder value calculation and the current year deduction.

There are a couple of variations of CRTs. A Charitable Remainder Annuity Trust (CRAT) pays a fixed dollar income to the non-charitable beneficiary(ies). The dollar amount must be no less than 5% of the initial trust value and no more than 50% of the initial trust value. Generally, the present value of the annual income stream is determined and subtracted from the value of the property transferred to the trust to arrive at the value of the remainder interest. The factors for determining the present value of an income stream payable for the life of the noncharitable beneficiary are in Publication 1457, Table S, Single Life Factors and the  present value of an income stream payable for a term of years are in Publication 1457, Table B, Term Certain Factors. There are slight adjustments that must be made for payments that occur other than annually at the end of the year, but your CPA should have software that can do those calculations for you.

The other CRT variation is a Charitable Remainder Unitrust (CRUT). In a unitrust, the percentage of the trust assets is fixed at between 5% and 50% of the initial trust balance, but the dollar amount of the distributions can fluctuate from year-to-year. Generally, the present value of the remainder interest (i.e., the charitable deduction) in a CRUT is determined by finding the present-value factor that corresponds to the trust’s adjusted payout rate. The present-value factor for a CRUT with an income interest payable for a term of years is in Table D, Term Certain Factors, of Publication 1458. The present-value factor for a CRUT with an income interest payable for the life of the noncharitable beneficiary is in Table U(1), Single Life Factors, of Publication 1458. If the income interest is payable for the lives of two individuals, use Table U(2), Last-to-Die Factors, in Publication 1458. You can use an online calculator to get a ballpark idea of the current tax deduction you could be entitled to, but your CPA will provide the final numbers for your income tax filing.
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If you plan to leave any property to a charitable organization at your death, you should consider using a CRT now instead. It can reduce your income tax bill and provide additional funds for you to be even more charitable.

Converting funds from a tax-deferred Rollover or Traditional IRA to a tax-free Roth IRA in retirement can be a smart move for managing your total income tax bill. Often, Roth conversions can be accomplished in lower tax brackets, protecting you from possibly higher brackets in the future and minimizing the income tax bite of Required Minimum Distributions (RMDs) from your Traditional/Rollover IRA in later years.

The earlier you can begin to efficiently convert funds to tax-free Roth assets the better. Doing so moves the growth of the converted portion of your tax-deferred accounts into income tax-free growth. The calculations can be daunting, so enlisting the aid of a CERTFIED FINANCIAL PLANNER™ professional or CPA will help.

But it is often wise not to convert 100% of your tax-deferred retirement money into a Roth IRA.

If you make charitable contributions on a regular basis, it would be more tax efficient to leave some money in your tax-deferred IRA to fund those contributions once you reach age 70 ½.  The Qualified Charitable Distribution rules allow for income-tax free distributions to qualified charities once you reach this age. For more information on the QCD rules check out this post.

The bottom line here is if used to fund your charitable giving, a Traditional/Rollover IRA gives you a very tax friendly option. Each year you can make donations that will not appear as taxable income on a 1099-R. That means you contributed the funds on a pre-tax basis, they grew without income tax consequences, and then they are distributed income tax-free. Given that, for most-- any charitable contribution over $300 per year for individual filers and $600 per year for joint filers, gets no income tax break at all-- this is a great way to save on your income taxes and support worthy causes at the same time.

Another reason to avoid a 100% Roth conversion is simply that having no taxable income is not the most tax-efficient plan. There is always a level of income that is free of income taxes-- the amount of income covered by your standard deduction and/or other above the line deductions. For 2021, the standard deduction for single filers is $12,550 and for joint filers it is $25,100. This means that if you had no other sources of income, you could withdraw those amounts from a Traditional IRA income-tax free.

It is unlikely you would be in this situation, but if you have a tax-efficient taxable investment account and a small pension or social security benefit, you might have some leeway to withdraw funds from a tax-deferred account at a 0% tax rate. Again, the calculations can be tricky, particularly if you are in the social security tax torpedo range, so seek out qualified help in making these decisions.

Taxes are not fun to pay or to calculate. But smart income tax planning can add thousands or even hundred of thousands of dollars to your bottom line. Working with a financial expert who understands how everything fits together can be one of the best decisions you could make.

If you're age 72 or older you probably know you must begin taking distributions from your IRA -- whether you want to or not.  

The IRS life expectancy tables determine your Required Minimum Distribution (RMD) based on the previous years ending balance for your IRA and your attained age for the tax year.

The Qualified Charitable Distribution (QCD) rules provide those subject to RMDs an option that can help them reduce their income tax liability by having certain charitable contributions made directly to a qualified charity. Given the changes to itemized deductions and the standard deduction in the 2017 tax law update, the Qualified Charitable Distribution rules for your IRA account becomes even more important.

If you make charitable contributions throughout the year, it would be wise to consider making those contributions directly from your IRA. Up to $100,000 of charitable distributions from each IRA owner's accounts can be excluded from your taxable income each year.

Say you plan to give $10,000 to your church or another qualified charity and you're receiving taxable distributions from your IRA. If you make the contribution to the charity directly from your IRA, your $10,000 gift will not be reported as income on your income tax return.
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If you instead receive these funds as income from your IRA distribution and then send the same $10,000 to the charity, it is included in your taxable income and could result in higher Medicare premiums and a higher percentage of your Social Security income being taxable. If you don't have itemized deductions that exceed the new $24,000 per couple or $12,000 per individual standard deduction, you could lose all the tax benefits of your generosity.

By having the distributions sent directly to the qualified charity from your IRA, you will exclude the amount from your taxable income, potentially lowering your Medicare premiums, the taxable portion of your social security benefits, and your overall income tax rate at both the federal and state level.
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If you follow this strategy, be sure to let your income tax preparer know. There may be no indicator on the 1099R you receive at the end of the year that shows that part of your distribution is non-taxable, so there is a chance many people using this strategy are over-paying their income taxes each year.

A donor advised fund (DAF) is a relatively new tool that helps both taxpayers and charities reduce taxes now while providing planned donation strategies to continue in the future. Much like a deductible IRA, assets contributed to these donor accounts produce tax savings based on specific IRS guidelines.
 
For taxpayers who itemize deductions every dollar donated to a donor advised fund reduces the donor’s taxable income dollar-for-dollar in the year of the gift. For high earners this is one of the few strategies to reduce taxable income outside employer retirement plans and benefit packages. Once in the account, the gifted assets grow tax-free until the donor decides to distribute the funds to the qualified charities they desire.
 
There’s great advantage in the flexibility a donor advised fund offers. Donors make contributions now to reduce taxes now, those donations then grow via investments tax-free and those appreciated assets are then distributed at some time in the future to a qualified charity. This is a good deal for everyone involved, except Uncle Sam. 
 
For those in the highest tax bracket, every $1,000 donated to your donor advised fund results in a Federal and SC state tax savings of ~$440.  Donating $100,000 would save that same taxpayer $44,000 in Federal & state income taxes; you can also use a DAF to avoid taxation on appreciated assets with low cost basis altogether.

​To really compound the tax savings inherent with a DAF, we recommend donating appreciated stock positions from your taxable accounts. You avoid capital gains taxes, get full value of the gifted equities in the form of the tax deduction and the assets grow tax-free until distributed to a qualified charity. Be sure you only contribute shares that you have held for at least twelve months. For any shares held less than twelve months you can only deduct your cost basis.

​Some taxpayers may consider bundling annual contributions to their Donor Advised Fund into a single year to avoid wasted donation dollars that the newer and higher standard deductions produce.
 
For example, if you plan to give $50,000 a year for the next 10 years, and you know you have a big real estate sale, sales or performance based bonus, or generally know your taxable income will be irregularly elevated in a single tax year, you may want to bundle those annual amounts into a single, large donation that year. In this scenario, you’d donate $500,000 immediately but only distribute $50,000 each year out of the DAF while the remaining principle donations continue to grow tax-free via your investments; This strategy allows a taxpayer to continue their plan of gifting $50,000 annually while realizing a tax savings of ~$220,000 in the year of the windfall.