Most people have an organization or cause they’re
passionate about, and contributing financially to non-profit organizations may
be a part of many peoples’ annual financial plans. In planning for 2013, consider
the America Taxpayer Relief Act of 2012 that was part of the legislation to
partially avoid the “fiscal cliff.” This legislation could have implications on
your charitable giving intentions, particularly if your income exceeds certain
thresholds.
The changes may enhance the tax advantages of
making charitable donations in some cases, while at the same time creating a
less favorable tax environment in other cases. It is important to note that
most taxpayers won’t see any impact on the tax status of their charitable
donations in 20131.
A popular strategy used in the past by
individuals age 70½ or older was to roll IRA dollars directly to a qualified
charity. The new tax bill reinstated this provision for direct charitable
rollovers of up to $100,000 for 2013. The charitable IRA rollover offers two
notable advantages:
1.
Rather than claiming income from an IRA
distribution and then deducting the amount of the contribution on a tax return,
the money can be rolled directly to the charity. This avoids the need to claim
income first before making the deduction, potentially reducing the overall tax
liability2.
2.
For those who must take required distributions
from their Traditional IRA (an obligation after reaching age 70½), all or some
of that distribution can be represented in the charitable IRA rollover. Again,
this eliminates the requirement to claim income when the individual may not
need it to meet living expenses.
For now, the IRA direct charitable rollover
provision does not apply beyond 2013.
Limits
on Itemized Deductions
There has been much publicity about the
reinstatement of a law that expired after 2009 that calls for a limit on
itemized deductions. The so-called Pease Provision (named for a retired
Congressman who authored the law) applies a limit on married couples filing a
joint return who earn more than $300,000 and single tax filers earning more
than $250,000.3
The Pease Provision applies a 3 percent cut in
itemized deductions based on adjusted gross income (AGI) that exceeds the
above-listed thresholds. In the case of a single person earning $400,000 in AGI
in 2013, $150,000 will be used to determine the 3 percent reduction in itemized
deductions. Three percent of $150,000 results in deductions being reduced by
$4,500. For a married couple filing a joint return with earnings of $500,000,
itemized deductions would be reduced by $6,000 (3 percent of the $200,000 above
the threshold amount for married couples). However, a taxpayer can’t lose more
than 80 percent of their deductions, and the reduction doesn’t apply to certain
itemized deductions (i.e. medical expenses, casualty and theft losses).
What’s important to keep in mind is that the
reduction in itemized deductions is calculated based on the amount of AGI, not
on the value of deductions taken. Most taxpayers will not see their charitable
deductions impacted by these limitations. There are rare situations when
individuals with itemized deductions that represent a very small share of total
income may have less incentive (from a tax perspective) to expand those
deductions.
The
benefit to higher income taxpayers
Taxpayers subject to the reduction in itemized
deductions may have more reason to expand giving anyway. At the highest levels,
tax rates have increased. For single filers with taxable incomes over $400,000
and married couples filing a joint return with taxable incomes above $450,000,
the highest tax rate has risen to 39.6 percent from the previous top rate of 35
percent.
As a result, for every $1,000 in annual
charitable contributions, federal income taxes may be reduced by $396 dollars
(not accounting for the limit in itemized deductions mentioned above or state
income taxes) for taxpayers in the top income tax bracket. In and of itself, each
charitable gift for these taxpayers has a more favorable impact on tax
liability than was the case in previous years.
Gifting
appreciated assets
Those in higher brackets may also want to
explore the benefits of gifting appreciated assets such as stocks that have
grown in value in recent years.
Those meeting the $400,000 (individual) and
$450,000 (married couples) taxable income threshold are also subject to a long-term
capital gains tax of 20 percent on gains from the sale of appreciated assets, a
bump up from the previous top rate of 15 percent. As an example, by gifting to
a qualified charity shares of stock that have risen in value, the investor
avoids the capital gains tax and may be able to deduct the fair market value of
the gift from his or her income. Gifting appreciated assets (to the
extent the gains would otherwise fall into the top tax bracket) is not
a new strategy, but may be more appropriate given the new, higher tax rates
that now apply to some investors.
No matter what your giving intentions are, it’s
important to understand how tax changes can impact your financial plans.
Consider working with a tax advisor or another financial professional if you
plan to gift a significant amount to charity this year.
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1 Keep in mind that under existing rules, charitable deductions may be
limited based on the taxpayers AGI, type of property donated, type of
charitable organization, use of the donated property, etc.
2 For example, using this provision can avoid the negative tax
consequences that may result from having a higher AGI, such as causing social
security benefits to be subject to taxation or phasing out other tax benefits.
3 This applies to taxpayers with AGI in excess of $250,000 (single),
$275,000 (head-of-household), $300,000 (married, filing jointly) and $150,000
(married, filing separately).
Renée A. Hanson, CFP®, CEP®, CDFA™, CFS, is a private
wealth advisor with Hanson, Ayala & Associates, a private wealth advisory
practice of Ameriprise Financial Services, Inc. Her passion is in helping women
achieve their dreams and financial goals, regardless of life’s many obstacles.
Renée is licensed/registered to do business with U.S. residents only in the
states of AZ, CA, CO, GA, IA, IL, MI, MN, MT, NH, NJ, NM, NY, OH, PA, SC, TX,
VA, WA, WI. Please visit: www.reneehanson.com to learn more.
Brokerage, investment and financial advisory services are
made available through Ameriprise Financial Services, Inc. Member FINRA and
SIPC. Some products and services may not be available in all jurisdictions or
to all clients.
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Inc. All rights reserved. File
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