Stewart Welch writes: Reader Question: For the tax year 2012, I was able to give a portion of my yearly IRA distribution directly to an approved charity (my church) tax free. I have been unable to determine if this type of distribution will be allowed for 2013 tax year. Please advise and thanks. D.D.
Answer: First of all, this is a great idea and thanks for reminding me so I can remind our readers. The American Taxpayer Relief Act of 2012 extended through calendar year 2013 the Qualified Charitable Distribution (QCD) provision which allows you to transfer money directly from your IRA to a qualified charity. A couple of reminders regarding the rules:
1. You must be age 70 ½ or older in the calendar year the transfer is made.
2. $100,000 is the maximum that can be transferred in a calendar year.
3. You don’t get a tax deduction. Because the money is coming from an IRA account in which you’ve already received a tax deduction, you don’t receive a new deduction.
4. Generally, you can use the QCD to satisfy your Required Minimum Distributions (RMDs) for this tax year. If you are planning to make charitable gifts equal to or in excess of your 2013 RMD, this ‘simplifies’ that transaction.
The advantage of the QCD is that you avoid taking the IRA funds directly with the implied income tax implications and get the funds directly to the charity. It also reduces the balance of your IRA account and therefore the future RMDs. A Donor Advised Fund is not treated as a qualified charity under this provision.
Here are a few other year-end strategies you should consider:
• Use appreciated stock (long-term capital gains) for charitable gifts. For example, you bought one-hundred shares of Apple stock at $100 per share and it is now trading at $500 per share. Instead of writing a $1,000 to your favorite charity, give the charity two shares of Apple. The charity receives $1,000 worth of stock which it sells and pays no income tax and you avoid the capital gains tax on a future sale of those shares. My partner, Hugh Smith, CPA, CFA, pointed out that we often run into a client situation where they have owned the stock for so long that the cost basis is unknown. “This is the perfect stock to give to charity! You eliminate the need to spend hours researching the cost basis (which many times cannot be found). If you want to continue owning the stock, use cash to buy it back…therefore establishing a new (and higher) cost basis”, Hugh said.
• Redirect a portion of your Alabama income taxes … for free! The Alabama Accountability Act, which was passed earlier this year, allows you to redirect the lesser of $7,500 or up to one-half of your State of Alabama income taxes to scholarships for low income children who are stuck in failing schools. These scholarships allow them to transfer to either non-failing public schools or to private schools. You receive a dollar-for-dollar State-of-Alabama income tax credit so this costs you nothing! So here’s the question: “Would you rather send 100 percent of your state income tax dollars to our legislators to do with as they please, or would you rather help a child from a low income family who desperately wants to get a better education but who is stuck in a failing school?”
"If you've already paid the bulk of your 2013 Alabama income taxes either through payroll deduction or quarterly estimated tax payments, you can still take full advantage of this strategy", says Jenny McCain, president of Scholarship for Kids. You'll simply follow the process, claim your tax credit on your 2013 tax return and receive a State of Alabama income tax refund. For a step-by-step guide, visit www.AlabamaKids.com. By using this guide you can complete the process in about 10 to 20 minutes. "Together, we can help substantially improve the education of our youth all across Alabama", Jenny added.
• Review your Medicare plan. Don’t forget to review your Medicare plans to ensure you have the most appropriate plan based on your situation. The open enrollment period ends Dec. 7. Kimberly Reynolds, a partner here at The Welch Group and expert on Medicare plan selection, suggests that you visit www.Medicare.gov, to review plan options available to you. “You can save a lot of money by matching a Prescription Part D plan to the actual medications you use,” Kimberly said.
• Retirement plan contributions. If you have not maxed out your contributions to your company 401-k you can use the remaining paydays to increase your investment and income tax deduction at the same time. You’ll need to contact your human resources department for their assistance in adjusting your payroll deduction.
Andrew M Brown writes:
Andrew M Brown writes:
Use Your IRA for Charitable Contributions?
Yes, but you need to be over 70-1/2 and do it before the end of the year.
If you don’t need the income and have charitable contributions to make, don’t overlook this great way to kill two birds with one stone, called a Qualified Charitable Distribution (QCD).
The charitable IRA rollover is an ideal way to make a charitable contribution and fulfill the Required Minimum Distribution (RMD) for 2013. Not having to report the RMD as income is a huge tax benefit that is much better that taking a charitable tax deduction. The value here lies in your adjustable gross income (AGI). If money goes out of your IRA into your checking account and then you write a check to charity, you get a tax deduction, but the IRA distribution goes into your gross income. The deduction for the charitable gift reduces your taxable income, but not your adjusted gross income.
Several taxes are calculated from your AGI: Medicare premiums, medical expenses, taxability of social security benefits, phase-outs of personal deductions, and the surtax on investment income. When you make the gift directly from your IRA, these taxes are bypassed all together. All of those things are affected by adjusted gross income and you just bypass it by making a gift directly.
This technique helps not only high-income individuals, but also lower income individuals. If you are in a lower income tax bracket, you may benefit because it can reduce the taxation of your social security benefits. You may be able to use the standard deduction even though you’re getting the itemized deduction effectively by making a charitable gift.
Someone who has already taken his RMD for a particular year cannot use a QCD later in the year to fulfill his RMD requirement for that year; he cannot roll the already-taken RMD back into the IRA (to enable him to use a QCD instead)bbecause RMD’s are not eligible rollover distributions.
Charitable Reminder
Contributions are deductible in the year made. Thus, donations charged to a credit card before the end of 2013 count for 2013. This is true even if the credit card bill isn’t paid until 2014. Also, checks count for 2013 as long as they are mailed in 2013.
Always consider gifting appreciated securities instead of cash, which is very tax inefficient. Gifting stock with a fair market value of $3,000 with a cost of $1,000 could save $300 in tax ($2,000 x 15%), plus you still receive a charitable deduction.
Roth Conversion Considerations
Roth conversions don’t always carry a tax bill, and you can mitigate a tax bill by pairing tax strategies. For instance, you could increase your charitable deductions to match the amount of your Roth conversion. If a passive activity with suspended losses becomes unsuspended, that would be a great time to consider a Roth conversion. Remember, there are no income limits for Roth conversions. You have until October 15, 2014, to decide if a 2013 Roth conversion makes sense; this “out” is called a “recharacterization.”
Don’t Forget Your Contributions
If you turned 50 this year you are entitled to a catch up contribution of $5,500 for your 401(k). It is not too late to catch up for 2013. Also, anyone with compensation can contribute to an IRA. It’s the deductibility of the IRA contribution that is subject to income limits. If you are not eligible to do a deductible Traditional IRA then consider a Roth IRA. The Roth IRA contribution limits are significantly higher than deductible Traditional IRAs. If your Adjusted Gross Income (AGI) is below the amounts listed, you can make a full IRA contribution. If your AGI is too high, you still have an opportunity to contribute to a non-deductible IRA. There is no income limit for non-deductible IRA contributions and the assets inside the IRA will grow tax deferred.
2013
|
2012
|
2013
|
2012
| ||||||||
| IRAs | Roth IRA | ||||||||||
| IRA Contribution Limit |
$5,500
|
$5,000
| IRA Contribution Limit |
$5,500
| $5,000 | ||||||
| IRA Catch-Up Contributions |
$1,000
|
$1,000
| IRA Catch-Up Contributions |
$1,000
| $1,000 | ||||||
| IRA AGI Deduction Phase-out Starting at: | ROTH IRA AGI Contribution Phase-Out Starting at: | ||||||||||
| Joint Return |
$95,000
|
$92,000
| Joint Return |
$178,000
| $173,000 | ||||||
| Single or Head of Household |
$59,000
|
$58,000
| Single or Head of Household |
$112,000
| $110,000 | ||||||
| SEP | |||||||||||
| SEP Minimum Compensation |
$550
|
$550
|
2013
|
2012
| |||||||
| SEP Maximum Compensation |
$255,000
|
$250,000
| 401(k), 403(b), Profit-Sharing Plans, etc. | ||||||||
| SIMPLE Plans | Annual Compensation |
$255,000
|
$250,000
| ||||||||
| SIMPLE Maximum Contributions |
$12,000
|
$11,500
| Elective Deferrals |
$17,500
|
$17,000
| ||||||
| Catch-Up Contributions |
$2,500
|
$2,500
| Catch-Up Contributions |
$5,500
|
$5,500
| ||||||
| Defined Contributions Limits |
$51,000
|
$50,000
| |||||||||
Watch Your Capital Gains
Under the tax law there are now four long-term capital gains tax rates (0%, 15%, 18.8% and 23.8%). Old school advice was to tax-loss harvest to erase your gains. For 2013 and beyond, tax-loss harvesting may not be the best advice. Depending upon your income bracket, if you wait until next year the long-term capital gains rate could increase 23.8% rather than 15%.
Married threshold
|
L/T capital gains rate
| |
| Up to $36,250 in taxable income | Up to $72,500 in taxable income |
0%
|
| $36,251 to $200,000 | $72,501 to $250,000 |
15%
|
| $200,001 to $400,000 | $250,001 to $450,000 |
18.8%*
|
| Over $400,000 | Over $450,000 |
23.8%*
|
| *Includes 3.8% Medicare Surtax |
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