Taxation

Capital gain income is income that is reported on Schedule D of Form 1040. Capital gain income is reported when a taxpayer sells appreciated property. Typically, the seller must report all the appreciation in the property as capital gain income.

Capital gain is the difference between what a person paid for an asset and its current fair market value.  For example, if a person purchased some stock for $5,000 and the stock is now worth $15,000, the person's capital gain in the stock is $10,000.

Capital gain in property that has been held for longer than one year is called long term capital gain and is taxed at capital gain tax rates.  Capital gain in property that has been held for one year or less is called short term capital gain and is taxed at ordinary income tax rates.

In 2015, the first $14,000 that a taxpayer gives to another individual each year is excluded from gift tax under the annual gift tax exclusion.  For example, a couple with three children can give $78,000 away to their children each year without making a taxable gift.  This is because there are two donors and three recipients: 2 x 3 x $14,000 = $84,000.

The alternative minimum tax (AMT) is an income tax that is designed to assure that taxpayers with large deductions pay at least a minimum amount of income tax.

Adjusted gross income, or AGI, is the total reportable income received by a taxpayer during the tax year after “above the line” adjustments, such as IRA contributions, have been made, but before any itemized deductions have been taken.  Certain charitable deduction limitations are computed based on a taxpayer's AGI.

You are working with a donor who decides that they really don’t need income themselves, but they would like to make a gift that provides income for someone else. The income beneficiary may be a child, parent, friend or employee, and the gift may be a remainder trust, gift annuity or pooled fund. Alarm bells should go off, as there are some tax issues that may come as a surprise.

The Potential Taxes

In December 2010, Congress passed the Tax Relief, Unemployment Reauthorization, and Job Creation Act of 2010. Among its numerous provisions, the 2010 Act extended the income tax rate reductions enacted during the Bush administration through December 31, 2012. This means that income and capital gains tax savings from lifetime charitable gifts of cash or other assets will remain unchanged at least until the year following the next presidential election.

In the event that Congress does not act in the meantime, on January 1, 2013 tax rates will revert to those in effect when President Clinton left office; the top income tax rate would be 39.6 percent, capital gains would be taxed at a 20 percent rate, and dividends would be taxed at ordinary income tax rates, potentially as high as 39.6 percent. These changes would increase the tax incentives for charitable giving.