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Social Capital: Maximizing Your Charitable Impact

Late last year the President signed the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act into law. One of its important provisions reinstated for 2011 the option for direct distribution of funds from IRAs to qualified charities. This applies to investors over 70 ½, and who are taking their required minimum distributions.

In the past, if you were older than 70 ½ and planning a charitable donation, you would have to first recognize your RMD, or required minimum distribution, as taxable income. Then the money could be used to make your contribution. The contribution would be shown on your tax return as a charitable deduction, part of your itemized deductions and subject to any limitations that apply.  Your other alternative would be to gift appreciated stock or other assets directly to your chosen charity, avoiding capital gains tax, and taking the current value of the asset as a charitable deduction.

The reinstated law (at this time only for 2011) allows you to request your IRA custodian to send all or a portion of your required minimum distribution directly to a qualified charity. The amount sent to the charity is not counted as taxable income, and no charitable deduction would apply.  This special distribution to charity is limited to $100,000; if your required distribution is over that amount, you may only exclude $100,000 from your income when gifting directly from your IRA.  The donation must be made at your instruction from the IRA custodian to the charity; you should not take receipt of the distribution first. While this regulation applies to all types of pre tax IRAs, including inherited IRAs, keep in mind that you are only eligible if you are over 70 ½ and taking RMDs.

Should you take advantage of this in 2011? Well, your CPA can help you determine which approach is best for you, a donation of cash, a direct IRA gift, or a gift of appreciated assets. The direct IRA gift makes particular sense for those who do not itemize, and would be unable to use the charitable deduction. It also may make sense for those who are planning to make a substantial donation this year. You are normally not allowed to deduct more than 50% of your income for cash gifts, (or 30% if to a private foundation) in any given year. While excess amounts can be carried forward, the directed IRA gift is often simpler and more straightforward; up to $100,000 will not be recognized as income at all.

Community foundations across the country have proven especially valuable to both large and small investors who wish to make their charitable donations in the context of a comprehensive plan, and in many cases focus on programs that are local in their intent and impact. The Community Foundation of the Low Country, which was established on Hilton Head Island in 1994, provides donors with many different types of charitable funds and endowments, often addressing local concerns, as well as important resources and information to help donors maximize the benefit to the charity, while receiving the applicable tax benefits. For more information you can contact Emmy B. Rooney, Vice President for Development and Donor Services, at (843) 681-9100, or visit their website at www.cf-lowcountry.org.

Remember that the rules regarding charitable contributions can be somewhat complicated. For example, there are certain types of charities and non-profits, donor advised funds and charitable lead and remainder trusts which do not qualify for the special IRA transfer rule. To donate to these, funds must first be withdrawn from the IRA, recognized as income, contributed to these entities, and then handled in the traditional fashion, through itemized deductions. Be sure you consult with your CPA or tax professional when planning charitable gifts, to determine your own best strategy.

Steven Weber

Steven Weber is a Registered Investment Advisor and Director of Investments for the Bedminster Group. The Bedminster Group provides fee-only investment, estate and financial planning services.  The information contained herein was obtained from sources considered reliable, and does not constitute tax advice. Their accuracy cannot be guaranteed. The opinions expressed are solely those of the author and do not necessarily reflect those from any other source.

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