Charitable Gifts and Taxes (Doing Well While Doing Good)

October 03, 2013

It is never too late to support a worthy charity – you can even include them as a beneficiary of your will, IRA, annuity, life insurance, etc.  However, if you wish to qualify for a 2013 tax deduction, now may be an excellent time to make your gift.  Outlined below are two tax favorable ways to do well while doing good.

 

 A.  TIPS AND TRAPS ON 2013 IRA CONTRIBUTIONS

IRA owners who are 70-1/2 or older have roughly three more months to complete 2013 qualified charitable distributions (“QCD”) – arguably the best strategy available for lifetime giving to organizations.

QCD’s are free of income tax, up to a maximum of $100,000, and can also count toward satisfying minimum IRA distributions required after age 70-1/2, thereby reducing taxable income, even for nonitemizers.

Donors need to be reminded that:

  • Only the IRA custodian can transfer gift amounts to a qualified organization.  If IRA owners withdraw funds and then contribute them to charity separately, amounts withdrawn will be taxable to the donor.

  • Gifts should be made before donors take their required annual IRA distribution for 2013.

  • IRA donors need receipts of the same kind provided for other types of charitable contributions.  It’s important that donors coordinate IRA contributions with donee organizations to ensure that appropriate documentation is provided.

  • Donors who made 2012 IRA gifts in January of 2013, under a provision in the American Taxpayer Relief Act of 2012, can still make a regular 2013 IRA gift before the end of the year.

  • Owners of “inherited” IRAs can make gifts (if they are over age 70-1/2), but other retirement plans, such as pensions, 401(k) plans and others are not eligible.

  • IRA gifts cannot be made to charitable remainder trusts or to establish charitable gift annuities.

  • IRA gifts do not count against the charitable deduction “ceilings” (50% of adjusted gross income for cash gifts, 30% for gifts of appreciated securities, with a five-year carryover for excess deductions).

  • QCD’s are not subject to withholding under Code §3405. The IRA owner requesting the distribution is deemed to have elected out of withholding under Code §3405(a)(2).

  • An IRA owner can use a distribution to satisfy an outstanding pledge to the charity.

B.  TAX SAVINGS FROM GIVING APPRECIATED SECURITIES

 TAX SAVINGS FROM GIVING MUTUAL FUNDS WORTH $10,000 THAT COST

$5,000 ORIGINALLY

Effective

Tax Bracket                 25%                 28%                 33%                 35%                 39.6%

Income Tax

Savings                        $2,500             $2,800             $3,300             $3,500             $3,960

Capital Gains

Tax Avoided               $   750             $   750             $   940*           $ 940*             $1,190**

Total Tax

Savings ***                 $3,250             $3,550             $4,240             $4,440             $5,150

Cost to

Give $10,000              $6,750             $6,450             $5,760             $5,560             $4,850

*      Includes 3.8% tax on net investment income.

**     Includes 3.8% tax on net investment income, plus a 20% capital gains tax rate.

***   The total tax savings are actually slightly higher due to tax owed to the State.