Tax Benefit – From Congress: An Early Christmas Present For The Charitably Inclined by Tara Thompson Popernik, Alliance Bernstein
Christmas came early for US taxpayers when Congress passed the Protecting Americans from Tax Hikes (PATH) Act of 2015 on December 18. The Act extended several expired tax provisions, some permanently, including qualified charitable IRA distributions. But other giving strategies may make some philanthropic taxpayers even merrier come tax time.
Qualified Charitable Distributions: The Best Alternative?
Signed into law on the same day, the PATH Act of 2015 allows IRA owners above the age of 70.5 years to donate up to $100,000 directly from their IRA to a qualified public charity (but not donor-advised funds, supporting organizations, or private foundations).
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The gift counts toward the donor’s Required Minimum Distribution (RMD) amount, but not toward federal Adjusted Gross Income (AGI). Because the gift is excluded from AGI, there is no charitable income-tax deduction. Instead, the qualified charitable distribution avoids tax on embedded income from an IRA distribution. By contrast, a gift of appreciated stock avoids tax on embedded capital gains and also provides a current-year charitable income-tax deduction.
Qualified charitable distributions will benefit many donors, especially those who have exceeded annual income limitations on charitable income-tax deductions or who do not itemize deductions. But for other taxpayers, a gift of appreciated stock provides a larger overall tax benefit. Donors should review all of their options with their tax advisor before taking action.
For a donor in the top federal income-tax bracket, a $100,000 gift from an IRA to charity will avoid $39,600 in embedded tax (Display). That is, it would reduce the donor’s effective cost of the gift to just $60,400.
The display also demonstrates that a cash gift would result in the same economic benefit, assuming the donor could take full advantage of the charitable income-tax deduction in the current year. That’s a big assumption for donors who face deduction limits, so the qualified charitable distribution may be the best strategy if a donor’s only other option for a gift is cash.
Giving Appreciated Stocks
The combined benefit of avoiding the capital-gains tax and creating a charitable tax deduction can be larger than the benefit of the qualified charitable distribution, if the donor can take the charitable income-tax deduction. Many investors who bought stock over a year ago have large embedded gains that they can avoid by transferring the stock(s) to charity.
In addition, a stock gift is more flexible than a qualified charitable distribution, because appreciated stock can be given to charitable entities that are excluded from the IRA charitable rollover, such as private foundations, supporting organizations, and donor-advised funds.
Whether a donor plans to give stock or make a qualified charitable distribution, time is running out. Charitable gifts must be made by December 31, 2015, to count for the 2015 tax year.
Bernstein does not provide tax, legal, or accounting advice. In considering this material, you should discuss your individual circumstances with professionals in those areas before making any decisions.