This article serves as a nice reminder that with the changes in the tax laws beginning January 2013, not only is it important to continue to donate to charity, but it’s important to consider how one donates to charity.
For those taxpayers that are single with income over $250,000 and married filing jointly with income over $300,000, the Pease Limitations apply to certain deductions, including charitable deductions. For those taxpayers, income will not be offset dollar-for-dollar by charitable contributions. Instead, there is a limit on the deductions. The calculation requires that the lesser of 3% of income over the $250,000 (or $300,000 for married filing jointly) be reduced from the total number of certain itemized deductions, or if less, 80% of itemized deductions be reduced. For example, a single person with Adjusted Gross Income of $400,000 and deductions of $45,000, would reduce the $45,000 by the lesser of $4,500 (3% of AGI over $250,000), or $36,000 (80% of deductions). In this instance, deductions of $45,000 would be reduced by $4,500, leaving $40,500 in deductions.
For taxpayers in the above situation, receiving mandatory minimum required distributions from an IRA, one way to avoid the Pease Limitation on IRA income is to elect a direct charitable rollover. Instead of receiving a minimum required distribution of up to $100,000, which is treated as income, and then making a charitable gift, which then reduces the income less the Pease Limitations, a direct rollover allows the minimum required distribution to pass directly to charity without being treated as income. Without the additional income from the minimum required distribution there is not a coinciding charitable deduction of less than the entire contribution. This can only occur from an IRA, so if assets are in a qualified plan, they will need to be rolled over into an IRA first.
Another alternative is to make contributions of low basis stock to a charity rather than cash. The charity will sell the stock and use the proceeds. The taxpayer avoids both the 20% capital gain tax for the taxpayer, as well as the 3.8% surtax on taxpayers with income over certain income thresholds, i.e., $250,000 for taxpayers for married filing jointly.
The above article provides a nice reminder that while charitable giving is still extremely important, a little extra thought going into the process may provide additional tax savings while achieving the more important goal of being charitably inclined.