6 Proven Reasons to Make a Charitable Donation from Your IRA to Save Money

The American Taxpayer Relief Act of 2012 has temporarily extended the ability of certain taxpayers to make charitable donations from their IRA.

The Basics

Charitably inclined taxpayers over age 70 1/2 can donate up to $100,000 per year from their IRA to a qualified charity.  This is known as a Qualified Charitable Distribution. The donation must be made directly from the IRA to the qualified charity.

You don’t get a tax deduction for this contribution. However the distribution is not included in your income. This law had expired at the end of 2011.  “The Act” allows for these donations in 2012 and 2013.


6 Proven Reasons

1) The distribution counts towards your Required Minimum Distribution (“RMD”).  Taxpayers over 70 1/2 must begin to take their RMD from their IRA. By making a Qualified Charitable Distribution this amount will count towards their RMD. As mentioned above, it is not included in your income.

2) If you don’t itemize your deductions you get no tax benefit from making a charitable donation. Taxpayers can deduct either the Standard Deduction or Itemize their deductions. Whichever is higher. The most common itemized deductions are mortgage interest, property and state income tax, charitable donations and medical expenses. For Married Couples filing jointly the Standard Deduction in 2012 is $11,900. It is estimated that approximately 70% of all taxpayers claim the Standard Deduction.

3) If you do itemize your deductions there is a limit on your cash (check) gifts of 50% of Adjusted Gross Income (“AGI”). The limit on giving away appreciated property is only 30% of AGI. Appreciated property is property that is worth more than the cost basis. Making a Qualified Charitable Distribution avoids these limitations.

4) By making a Qualified Charitable Donation AGI will be lower. If you donate the amount of your RMD, this will not be included in income and will lower your AGI. This may make some taxpayers eligible to deduct more itemized deductions. Medical and Miscellaneous Itemized Deductions are calculated as a percentage of AGI.

5) Your State income tax may be lower if it is calculated on AGI. Many states use AGI to calculate the tax.  Connecticut is one of those states.

6) Your taxable estate will be reduced. A Federal Estate tax applies to taxable estates over $5.12 million dollars in 2013. The estate tax rate is 40%. States may also have an estate tax. In Connecticut the estate tax is applied to taxable estates over $2 million dollars. Making this donation will reduce your taxable estate and any potential estate taxes.

If you are eligible, will you take advantage of this strategy?

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Tom Scanlon has over thirty years experience in public accounting with an extensive background in the areas of financial, tax, and estate planning. He prides himself on providing in-depth and customized solutions to privately held businesses and their owners. He is a Certified Public Accountant and Certified Financial Planner®. Tom is a frequent speaker for area organizations and has  recently been quoted on CNBC, Fox 61 News and AARP's blog. Tom also has been a guest columnist for numerous publications including The Wall Street Journal, Barron's, Money Magazine, The Hartford Courant, The Hartford Business Journal, and The New Haven Register. He is a member of the American Institute of Certified Public Accountants, the Connecticut Society of Certified Public Accountants, and the Financial Planning Association. Active in the community, Tom supports a variety of not-for-profit organizations.

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