New Tax Laws and Your Giving Intentions
Contributing financially to non-profit organizations may be part of your annual financial plans. If so, consider the America Taxpayer Relief Act of 2012 – enacted as part of the “fiscal cliff” deal. It could affect your charitable giving intentions, particularly if your income exceeds certain thresholds.
Charitable IRA Rollover in Place for 2013
In the past, many individuals over age 70½ rolled IRA dollars directly to qualified charities. The new tax bill reinstated the charitable IRA rollover up to $100,000 (and only for 2013), and offers two notable advantages:
1. The money is rolled directly to the charity, avoiding the need to claim income, then deduct it from your taxes. This potentially reduces overall tax liability.
2. Since you’re obliged to take distributions from a Traditional IRA after age 70½, all or some of that distribution can be represented in the charitable IRA rollover. Again, this eliminates the requirement to claim income not needed to meet living expenses.
Limits on Itemized Deductions
The Pease Provision applies a limit on itemized deductions for married couples filing a joint return and earning over $300,000 or single filers earning over $250,000.
The provision cuts itemized deductions by 3% based on adjusted gross income (AGI) that exceed the above-listed thresholds. For example, a single person earning $400,000 in AGI in 2013 will see a 3% reduction in itemized deductions for the $150,000 over the base ($250,000). Three percent of $150,000 equals a $4,500 reduction in itemized deductions. Taxpayers cannot lose more than 80% of their deductions, and the reduction doesn’t apply to certain itemized deductions (i.e. medical expenses, casualty and theft losses).
Remember, the reduction in itemized deductions is calculated based on the amount of AGI, not the value of deductions taken. Most taxpayers will not see their charitable deductions impacted by these limitations.
The Benefit to Higher Income Taxpayers
Taxpayers subject to reductions in itemized deductions may have reasons to expand their giving, since tax rates have increased to 39.6% for single filers (taxable incomes over $400,000) and married couples filing a joint return ($450,000).
In this tax bracket, $1,000 in annual charitable contributions reduces federal income taxes by $396 (not counting state taxes or limits in itemized deductions). Therefore, each charitable gift exceeds the impacts of tax liability than in previous years.
Gifting Appreciated Assets
Consider the benefits of gifting appreciated assets, such as stocks.
Those meeting the $400,000 (individual) and $450,000 (married couples) taxable income threshold are also subject to a 20% long-term capital gains tax from the sale of appreciated assets. By gifting appreciated stocks to a qualified charity, the investor avoids the capital gains tax and may be able to deduct the fair market value of the gift.
With over 15 years of providing comprehensive financial, investment, retirement, and estate planning, Richard Fogg focuses on delivering services to clients who want a highly personal relationship with their financial advisor. Based in Carmel Valley, Mr. Fogg is appreciated by his clients for bringing experience and integrity to help them achieve their hopes, dreams and aspirations. Fogg & Associates is an Ameriprise Platinum Financial Services® practice of Ameriprise Financial Services, Inc.[divider top=”1″]
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© 2012 Ameriprise Financial Services, Inc. All rights reserved. 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. Ameriprise Financial Services, Inc. does not provide tax or legal advice. Consult your tax advisor or attorney.