With year-end giving in full swing, the best tax break for seniors with IRA’s remains undiscovered by most. I have already received year- end requests from three well-known national organizations. Why is this important you may ask? The reason is not complicated—they are trying to avoid paying income taxes and Churches rarely make the “ask”. This in this busy holiday season I would challenge you to promote the advantages in year-end giving. Here are a few considerations:
1. Gifts of appreciated stock and real estate
The market has been amazing leaving many with large tax liabilities when they sell. Property values have recovered and appreciated since the recession. Assets with appreciation can be given to the church, avoiding capital gains tax and receiving charitable donation credit for the current market value. The list of potential assets is limitless. For example, timber makes an excellent gift because of its low-cost basis, and the sale is almost entirely subject to capital gains.
Unique senior opportunity examples: A childless, older couple gives their church a farm house and 50 acres holding a “life estate”. This allows them to live in their home for life without maintenance cost. A 95-year-old woman living off the dividends of her stock portfolio trades $1 million in stocks for a single premium annuity that costs the church less than $200,000.
2. Gifts from IRA accounts
When people in their 20’s and 30’s deposit in IRA accounts, they are mostly unaware that funds will ever be subject to income tax. When they reach 70 ½, they become aware that the tax code requires them to take a “minimum required distribution” (MRD). For most, the amount they are required to withdraw as taxable income is 3-4% of the account balance. The average value of an IRA is $600,000. It’s easy to see that adding over $20,000 dollars to their social security and other taxable income would cause concern.
Fortunately, for charitable-minded seniors, there is a way to avoid the additional tax.
Bernie Kent in a Forbes magazine blog Should You Make A Charitable Contribution From Your IRA? states:
“One of the key benefits of the direct charitable contribution from your IRA is that the distribution counts towards your Required Minimum Distribution (RMD). You can contribute more than your RMD to charity as long as you do not exceed $100,000 in a calendar year…. However, you may not receive anything (other than an intangible religious benefit) from the charity as a quid pro quo for your contribution. The charity must provide you an acknowledgement stating the amount of the charitable distribution and that no goods, services, or benefits of any kind were or will be provided to you in consideration for the distribution from the IRA. Also, the contribution cannot go to a donor-advised fund, supporting organization or private foundation.”
This benefit that has been available for several years on a year-by-year basis (required extension each year) became permanent December of 2015.
This provision is the only way any funds can ever be removed from an IRA without paying tax. A person with a committed desire to give should consider this vehicle first. The only possible better tax-saving benefit could be giving an asset with long-term appreciation with a zero cost basis.
For more information see Charitable IRA Distributions: A Great Opportunity by David K. Smucker, CPA and/or read this helpful article on How to Avoid Taxes on IRA Withdrawals by Emily Brandon.
3. Big Losers from Tax Act: Churches and Charities
As it stands now, the current tax bill would help the taxpayer but not churches and non-profits. The reason is the increase in the standard deduction. The increase is from $6,350 to $12,000 for individuals, and from $12,700 to $24,000 for couples. There is also a lowering of individual tax rates across the board.
How is that bad for churches and other non-profits? The reason is simple—donors won’t benefit as much from tax-deductible contributions. This makes it imperative for organizations to urge donors to give in the 2017 tax year. Reduced capital gains tax and a higher standard deduction produce the perfect storm for a decrease in charitable giving. For more information see Dylan Matthews’ article 4 winners and 3 losers in the Senate tax bill.
As always, I am available by phone or email to answer any questions you may have and help in any way I can.
**Disclaimer: No decisions regarding giving should be made without consulting your tax professional. Tax laws are constantly changing