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Year-End Charitable Giving

Lynndsy Beckmann

Specializes in small business preparation and planning, investment advisory services, QuickBooks consulting

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Year-End Charitable Giving

With the holiday season upon us and the end of the year approaching, we pause to give thanks for our blessings and the people in our lives. It is also a time when charitable giving often comes to mind. The tax benefits associated with charitable giving could potentially enhance your ability to give and should be considered as part of your year-end tax planning.

Tax deduction for charitable gifts

If you itemize deductions on your federal income tax return, you can generally deduct your gifts to qualified charities. This may also help increase your gift.

Assume you want to make a charitable gift of $1,000. One way to potentially enhance the gift is to increase it by the amount of any income taxes you save with the charitable deduction for the gift. At a 24% tax rate, you might be able to give $1,316 to charity [$1,000 ÷ (1 – 24%) = $1,316; $1,316 x 24% = $316 taxes saved]. On the other hand, at a 32% tax rate, you might be able to give $1,471 to charity [$1,000 ÷ (1 – 32%) = $1,471; $1,471 x 32% = $471 taxes saved].

However, keep in mind that the amount of your deduction may be limited to certain percentages of your adjusted gross income (AGI). Your deduction for gifts to charity is limited to 50% (currently increased to 60% for cash contributions to public charities), 30%, or 20% of your AGI, depending on the type of property you give and the type of organization to which you contribute. Charitable deductions that exceed the AGI limits may generally be carried over and deducted over the next five years, subject to the income percentage limits in those years.

Make sure to retain proper substantiation of your charitable contributions. In order to claim a charitable deduction for any contribution of cash, a check, or other monetary gift, you must maintain a record of such contributions through a bank record (such as a cancelled check, a bank or credit union statement, or a credit-card statement) or a written communication (such as a receipt or letter) from the charity showing the name of the charity, the date of the contribution, and the amount of the contribution. If you claim a charitable deduction for any contribution of $250 or more, you must substantiate the contribution with a contemporaneous written acknowledgment of the contribution from the charity. If you make any noncash contributions, there are additional requirements.

Year-end tax planning

When making charitable gifts at the end of the year, you should consider them as part of your year-end tax planning. Typically, you have a certain amount of control over the timing of income and expenses. You generally want to time your recognition of income so that it will be taxed at the lowest rate possible, and time your deductible expenses so they can be claimed in years when you are in a higher tax bracket.

For example, if you expect to be in a higher tax bracket next year, it may make sense to wait and make the charitable contribution in January so that you can take the deduction next year when the deduction results in a greater tax benefit. Or you might shift the charitable contribution, along with other deductions, into a year when your itemized deductions would be greater than the standard deduction amount. And if the income percentage limits above are a concern in one year, you might consider ways to shift income into that year or shift deductions out of that year, so that a larger charitable deduction is available for that year. A tax professional can help you evaluate your individual tax situation.

A word of caution

When making charitable contributions, be sure to deal with recognized charities and be wary of charities with names that sound similar to reputable charitable organizations. It is common for scam artists to impersonate reputable charities using bogus websites as well as misleading email, phone, social media, and in-person solicitations. Check out the charity on the IRS website, irs.gov, using the Tax Exempt Organization Search tool. And remember, don’t send cash; contribute by check or credit card.

IMPORTANT DISCLOSURES

Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual’s personal circumstances.

To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

This communication is strictly intended for individuals residing in the state(s) of NE. No offers may be made or accepted from any resident outside the specific states referenced.

Prepared by Broadridge Advisor Solutions Copyright 2023.

New Cancellation for Federal Student Loans and Delayed Repayment to 2023

On August 24, 2022, just a few days before federal student loan repayment was set to resume, President Biden announced a plan for additional student loan debt relief.

Federal student loan repayment was originally halted in March 2020 at the start of the pandemic. The new plan extends the payment moratorium through the end of the year, offers partial debt cancellation, and includes proposed updates to the Public Service Loan Forgiveness program and a new income-based repayment plan.

The new plan will cancel $10,000 in federal student loan debt for individual borrowers whose income is below $125,000 ($250,000 for married couples) in 2020 or 2021, plus another $10,000 for Pell Grant recipients.

What’s new
Here is the new framework for federal student loans.

Loan cancellation. The plan will cancel $10,000 of federal student loan debt for borrowers with an adjusted gross income less than $125,000 ($250,000 for married couples filing jointly). The loan cancellation increases to $20,000 for borrowers who are Pell Grant recipients.1 (A Pell Grant is a federal financial aid grant award to students from low-income households.) Eligibility is based on income from 2020 or 2021, but not 2022.2 The Department of Education estimates that 21% of the borrowers eligible for relief are 25 years and younger, 44% are ages 26 to 39, and the remaining 35% are ages 40 and up, including 5% who are senior citizens.

The Department also estimates that approximately 27 million borrowers (more than 60% of the borrower population) are Pell Grant recipients and will be eligible to receive up to $20,000 in debt relief.3

Payment pause extended. The pause on federal student loan repayment is being extended one “final” time through December 31, 2022. President Biden’s announcement states that “borrowers should expect to resume payment in January 2023.”4 In practice, borrowers should expect to hear from their loan servicer at least three weeks before their first payment is due.

Changes to the Public Service Loan Forgiveness (PSLF) program. Borrowers who are employed by a nonprofit organization, the military, or the government may be eligible to have their federal student loans forgiven through the PSLF program due to time-sensitive changes. These temporary changes waive certain eligibility criteria for the program and make it easier for borrowers to receive credit for past periods of repayment that would otherwise not qualify for PSLF. These changes expire on October 31, 2022.

Important note: Borrowers who might qualify for loan forgiveness or credit under the PSLF program due to these time-sensitive changes must apply to the program before October 31, 2022. Borrowers can visit the administration’s PSLF website for more information.

In addition, the Department has proposed allowing certain kinds of deferments and forbearances, such as those for Peace Corps and AmeriCorps service, National Guard duty, and military service, to count toward PSLF.

A new income-based repayment plan. The Department of Education is proposing a new income-driven repayment plan that does the following:

  • ►  For undergraduate loans, caps monthly payments at 5% of a borrower’s discretionary income (currently borrowers must pay 10% of their discretionary income)
  • ►  For borrowers with original loan balances of $12,000 or less, the loan balance would be forgiven after 10 years of payments (currently borrowers must repay their loans for 20 years)
  • ►  Raises the amount of income considered non-discretionary, with the result that a borrower who earns an annual salary based on a $15 minimum wage would not have to make any payments (the monthly payment would be calculated at $0)
  • ►  Covers a borrower’s unpaid monthly interest, so that a borrower’s loan balance won’t grow due to interest as long as the borrower is making monthly payments (under current income-driven repayment plans, a borrower’s loan balance can grow even if the borrower continues making monthly payments, because the interest keeps accruing)
  • ►  Makes income recertification automatic, which will allow the Department of Education to automatically retrieve a borrower’s income information every year instead of making borrowers recertify their income annually

Will my loans be cancelled automatically?
For most borrowers, no. The Department of Education will be creating a “simple” application for borrowers to claim relief, which will be available by early October. Borrowers who would like to be notified when the application is open can sign up on the Department’s subscription page. Once borrowers complete an application, their loan cancellation should be processed within four to six weeks. The Department recommends that borrowers apply before November 15 in order to receive loan cancellation before the payment pause expires on December 31, 2022. (The Department will still process applications even after the pause expires.)

Some borrowers, however, may be eligible to have their loans cancelled automatically because the Department already has their income data on record.

Are current students eligible for loan cancellation?
Yes, current students are eligible for loan cancellation, provided their loan was obtained before July 1, 2022. However, borrowers who are dependent students need to qualify based on parental income, not their own income.5

Are graduate students eligible for loan cancellation?
Yes, provided income limits are met and it is a federal loan, such as a Direct Loan or Grad PLUS Loan. Private loans are not eligible.

Do parent PLUS Loans qualify for cancellation?
Yes, provided the income limits are met. Any private loans taken out by parents to pay their child’s college education are not eligible.

Will I be taxed on my cancelled debt?
At the federal level, no. At the state level, maybe. Any student loan relief will not be treated as taxable income at the federal level, thanks to provisions in the American Rescue Plan Act of 2021. However, a handful of states that have not yet aligned their laws with this Act could still tax the amount of student debt forgiven unless they act to amend their laws and affirmatively exclude this debt.

I have more than $10,000 in student loan debt. Will my monthly payment be adjusted after cancellation?
It depends. Borrowers who are already in an income-driven repayment plan generally won’t see their monthly payment change because their payment is based on their discretionary income and household size, not their outstanding loan balance. By contrast, borrowers who are in a fixed payment plan should have their monthly payment recalculated by their loan servicer because their outstanding balance will be lower after loan cancellation, which should result in a lower monthly payment.

I made monthly payments during the payment pause. Can I still qualify?
According to the Department of Education, borrowers who continued to make payments on their federal student loans after March 13, 2020 will still qualify for loan cancellation (assuming they meet the income guidelines). Borrowers can request a refund by calling their loan servicer directly. According to Mark Kantrowitz, a financial aid and student loan expert, only 1.2% of borrowers continued to make payments during the payment pause.6

1) U.S. Department of Education, 2022
2) The New York Times, August 25, 2022
3-5) White House Fact Sheet, August 24, 2022
6) The Wall Street Journal, August 25, 2022

IMPORTANT DISCLOSURES

Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual’s personal circumstances.

To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

This communication is strictly intended for individuals residing in the state(s) of NE. No offers may be made or accepted from any resident outside the specific states referenced.

Prepared by Broadridge Advisor Solutions Copyright 2022.

Purchasing a Farm: Land Depreciation vs. Amortization

Jared Faltys

Specializes in financial planning, business tax planning, investment advisory services

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Purchasing a farm may seem like a good investment opportunity. However, with further analysis, the net return is often much lower than anticipated. This typically happens because investors also view agricultural land as a stable investment. Not to worry — there are ways to immediately improve the ROI on the land through potential tax benefits. When you purchase farmland, you may be able to depreciate or amortize various aspects of the farm. 

Amortization vs. Depreciation

When purchasing farmland, you will acquire not only the land but other assets that accompany it as well. Since many of these assets will eventually deteriorate and become unusable, their cost can be expensed based on their life expectancy. Amortization and depreciation are ways to calculate the value of these assets. 

Depreciation

Depreciation is a way to calculate the total cost of an asset over its useful life. It is used to establish the cost of obtaining the asset compared to the income it provides. Depreciation is used for tangible assets, such as buildings, machinery, or equipment. 

Amortization

Amortization is also a way to calculate the total cost of an asset over its useful life. However, amortization is used for intangible assets, unlike depreciation. Examples of intangible assets include trademarks, patents, and nutrients within the soil. 

Understanding these terms will help you during the prospecting phase of purchasing a farm, so you can be on the lookout for specific assets that you will be able to write off and gain a higher return on your investment. 

Depreciating Farm Assets

When considering a farm to purchase, you should be looking for specific structures that you file as depreciating assets to provide savings on your tax bill. Some of these structures may include fences, grain bins, farm sheds, irrigation systems, and other tools and equipment. Having the ability to write off these assets when tax season rolls around will help you offset the amount you are paying for the farm. 

Amortizing Farm Assets

Did you know that in certain instances you are able to amortize part of the physical dirt on your farmland? While uncommon, this is an approach that some choose to take and the return can be substantial. 

Overall, the general understanding of buying dirt is that you are unable to depreciate it until you sell the ground.  However, since farmland is commonly passed down throughout generations, farmers typically won’t ever see this value. 

How to Amortize Farm Assets

To amortize dirt on your land, the first step is to determine if there are more fertilizer nutrients in the ground than what is considered average. To check the levels of your land, you can hire an agronomist to collect soil samples from areas around the farm to analyze the nutrient values. 

Once you have this analysis, you can reach out to your local university’s agriculture department. Typically, they will perform studies to determine what is considered average for the embedded nutrients within their local soil. You can compare your specific dirt to the average values collected by the university to determine whether or not your land’s nutrient values are above average. If you have any values over the baseline, you can make a case that the ground can be amortized over the lifetime of those nutrients. 

McMill Can Help

Although the initial net return on farmland may not appear to be as high as you would expect, there are plenty of options to help increase your return on investment. Utilizing depreciating and amortizing assets will help you balance your return against your investment. 

McMill CPAs and Advisors are here to answer any other questions you still have about purchasing farmland. As your local experts in Norfolk, Nebraska, we can’t wait to assist you in your farming business along with other areas like tax planning, retirement planning, and risk management. Reach out to us today for more information.