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IRA Distributions to Charity: May be More Valuable Amidst Tax Law Changes

For years, taxpayers have been told that one of the most tax efficient ways to make charitable donations is through gifting highly appreciated securities. This strategy allows the donor to maintain the charitable deduction but also avoid the embedded capital gains tax liability on the individual security. While this strategy may still be optimal for many taxpayers, there might be a better way for high income earners to meet charitable goals following the recent passage of the American Taxpayer Relief Act of 2012.

Under the new legislation, individuals are allowed to make a Qualified Charitable Distribution (QCD) from their IRAs. A QCD allows retirement account owners to make a distribution directly from an IRA to a public charity, which does not include a private foundation or a donor advised fund. The distribution will not be counted as a taxable distribution or included in taxable income, therefore, not eligible for a separate charitable deduction. The QCD is also limited to a maximum of $100,000 in a single year for an individual. Additionally, the QCD can only be done if the taxpayer is over the age of 70 ½, and the distribution will go towards satisfying one’s Required Minimum Distribution (RMD) requirements.

High earners should pay close attention. The QCD could be a better planning strategy if the RMD would subject other sources of income, such as capital gains and dividends to the higher 20% tax rate (as opposed to 15% for lower bracket taxpayers). Additionally, a higher income level in 2013 could lead to the Medicare surtaxes on investment income. Finally, high earners also run the risk of having deductions phased out if income levels cross a certain threshold. So, high income taxpayers could potentially be the ones to benefit the most from this new tax provision as it potentially allows them to keep income levels below thresholds that could cause additional taxes.

The QCD could also be appropriate for taxpayers if:

  • The taxpayer does not have any taxable assets from which to make a gift of appreciated securities;
  • The taxpayer is expected to exceed the annual charitable deduction thresholds

The tax law changes for 2013 could present taxpayers with a better planning strategy to make charitable donations. Please work with your Wealth Advisor and your accountant to determine how the tax changes may affect your charitable planning.

 

Important Disclosure Information

Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request. This article is not a substitute for personalized advice from RegentAtlantic. This information is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.

RegentAtlantic does not provide tax advice. Please consult with a tax professional of your choosing prior to implementing any of the strategies discussed in the article.

This article is based on RegentAtlantic’s understanding of current tax legislation. Congress may change that legislation at any time.

Important disclosure information

Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.

Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.

This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.

RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.

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