Nauture & Nurture | Campaign News

Recent tax changes—what’s in it for me? *

by Phillip H. Buchanan, J.D.—Duke University

The Jobs and Growth Tax Relief Reconciliation Act of 2003 was signed into law by President Bush on May 28, 2003. It accelerated income tax rate reductions scheduled by 2006—cutting rates retroactive to Jan. 1, 2003. The former 27%, 30%, 35% and 38.6% rates were replaced by rates of 25%, 28%, 33% and 35%. The 2003 Tax Act also lowered the long-term capital gains tax rate from 20% to 15% (for gains after May 6, 2003). Dividend income from securities has long been taxed at income tax rates but, through the year 2008, the highest applicable rate will be 15%. Individuals in a 10% or 15% income tax bracket will only pay 5% on dividend income from 2003 - 2007, and 0% in 2008.

So why should a self-respecting environmentalist like you give a hoot about such sleep-inducing information? Well… not only can you impress the uninformed at family reunions, church picnics and cocktail parties, you can better plan your own financial affairs and charitable gifts to Duke! Although income tax rates may be a little lower, tax savings are still important. Charitable gifts to Duke should be structured to minimize your actual out-of-pocket cost of making the gift. Low interest rates also mean that certain types of charitable gifts are more attractive for donors. These include charitable gift annuities, retained life estates in homes or farms and charitable lead trusts.

Example 1—outright gift of appreciated stock—John and Sally of New York want to make a $10,000 gift to the Nicholas School. The Edwards’ top federal income tax bracket is 30%, which will save them about $3,000 in federal income taxes and $800 in state and local taxes. Rather than donate cash, they donate appreciated stock they own in a regional bank. The bank stock has grown in value since they purchased it for $1,000 so they will avoid federal (15% on $9,000) and state taxes (8% on $9,000) on the capital gains they would have incurred had they personally sold the stock. Their out-of-pocket cost of making this $10,000 gift to the Nicholas School is about $4,130.

Example 2—charitable gift annuity—Mary Williams is a 72-year-old Duke alumna who decides to donate $100,000 in cash to Duke in exchange for a 6.7% gift annuity that will pay her for the rest of her life (of the $6,700 payment, $4,368 will be tax-free income for the next 14.5 years). The $100,000 had been in a bank Certificate of Deposit that was paying 3%, all of which was taxable so she has nearly tripled her after-tax income! Ms. Williams will also receive an income tax deduction of $36,610 that she can use over as many as 6 years. When Ms. Williams passes away, she has directed that the gift annuity remainder will go to the Williams Field Trip Fund for Earth and Ocean Sciences.

Example 3—retained life estate in a home or farm—Robert Winston is 70 years old and owns a beach house along the Atlantic coast. Robert creates a deed giving himself lifetime ownership of the property, with the Nicholas School as the beneficiary at his death. If the home and property are valued at $600,000, Robert will receive an immediate tax deduction of about $370,000. When Robert passes away, the beach house will be sold and the proceeds directed to the Winston Family Fellowships at the Marine Lab.

Example 4—family wealth transfer with a charitable lead trust—Baxter Bogle has a total net worth of just over $5.5 million. He would like to support the Nicholas School and provide a “tax wise” future gift for his grandchildren, currently 3 and 5 years of age. Mr. Bogle creates a charitable lead trust with $1,500,000 that will make an annual payment to Duke of 5.05% ($50,050/year) for 30 years after which all trust assets will go to his grandchildren. There will be $0 of gift or estate taxes due on this wealth transfer. Under current tax law, if the lead trust grows at 7%/year, Mr. Bogle’s grandchildren would net about $2,768,000 at the end of the 30-year term, as opposed to $2,206,000 without a lead trust! Over the term of the trust, Mr. Bogle “sprinkles” the annual distributions among various scholarship, construction and unrestricted funds for the Nicholas School.

If you have questions or would like to consider any “tax wise” charitable gift to support Nicholas School students and programs, please contact Anita Brown, director of advancement, at 919-613-8019, e-mail anita.brown@duke.edu or Phil Buchanan in Duke’s Office of Planned Giving at (919) 681-0467, e-mail trustme@duke.edu.

Phillip H. Buchanan, J.D., is director of planned giving at Duke

*Nothing contained in this article should be considered tax or legal advice. Please consult with your personal tax advisors about your specific situation.