Q. I have some appreciated assets and one of my favorite charities suggested I donate them and fund a charitable remainder unitrust. They said this is a terrific way to avoid the capital gains tax and all of the other new taxes related to the Patient Protection and Affordable Care Act (PPACA). Ive donated appreciated property to charity in prior years and taken the full fair market value as a deduction, but this sounds a lot more complicated. Can you please explain the new taxes related to the PPACA, how these trusts relate to them and provide an opinion on the value of these trusts?
A. The charity is referring to the two new Medicare taxes. Beginning this year there will be a net investment income tax and an additional Medicare tax on those with modified adjusted gross income (MAGI) income above certain thresholds. Typically, MAGI is the same as a taxpayers regular adjusted gross income (AGI). Certain items excluded from your AGI such as foreign income and student loan deductions will be added back to determine your MAGI. The MAGI thresholds for these new taxes are $200,000 for singles and head of household filers, $250,000 if married filing jointly and $125,000 for those married filing separately. If your MAGI is at or above these thresholds a meeting with your tax professional may be prudent. The following is a brief explanation of these new taxes.
The Medicare tax will be an additional 0.9 percent on any earned income above $200,000. An employer will be required to withhold an additional 0.9 percent on income above $200,000, but they will not have to match this additional tax. The thresholds above still apply, but some married couples under or over these amounts may be surprised when they file their 2013 taxes. If one spouse earns $201,000 and the other earns $40,000 they will be under the $250,000 threshold, but the employer will still be required to withhold the 0.9 percent from the employee earning $201,000. A couple in this situation will need to file for a credit on their 2013 return. Alternatively, if both spouses earn $150,000 they will be over the $250,000 threshold, but neither employer will withhold the 0.9 percent Medicare tax. When this couple files they will owe the additional tax on $50,000, the amount above the threshold. If you are in this situation you may want to make estimated payments or increase your withholding allowance.
The net investment income tax is a 3.8 percent surtax on unearned income. Unearned income subject to the tax includes: taxable interest, dividends, rent, taxable annuity payments, royalties, net capital gains, passive activity income and income from investments. There are exclusions, such as being actively engaged in the trade or business generating sources of unearned income.
If you are in a high tax bracket and are charitably inclined, donating the appreciated property to a Charitable Remainder Unitrust (CRUT) may be a fine idea. The property is placed in a CRUT and then sold without having to pay any capital gains tax. The proceeds are invested in other investments and you would receive an income for your life based on a percentage of assets in the trust. The trust is revalued every year and if the value increases your income will increase. Upon your death, the remainder in the trust will pass without taxes or probate to the non-profit organization. You would also be able to take a charitable tax deduction for your donation to the trust. This is a very simple explanation of a complex topic so you need to work with an attorney or financial advisor that has experience with these types of trusts. Be sure and ask about set-up, administration and investment fees and expenses that would impact the value of this type of trust to you.
Reader note: In last weeks column concerning RMDs, single lifetime expectancy table should have read uniform lifetime expectancy table.
Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 97128, Raleigh, NC 27624