Merriman INSIGHT – Using Qualified Charitable Distributions to Maximize Charitable Gifts

On December 18, 2015, the president signed into law the Protecting Americans from Tax Hikes (PATH) Act of 2015. One of the popular tax provisions in this bill was to permanently extend the ability for IRA owners to make qualified charitable distributions (QCD) from their IRA to a qualified charity of their choice. Prior to the PATH Act, this provision expired multiple times since its debut in 2006, only to be temporarily extended by Congress each time, often at the last minute or retroactively. This uncertainty made charitable planning more difficult, but now we finally have clarity!

For those who are charitably inclined, a QCD can really maximize the effectiveness of charitable gifts.

Here’s how it works

IRA owners who are 70½ or older and would otherwise have to satisfy a required minimum distribution from an IRA may donate any portion up to $100,000 of the required distribution directly to qualified charity. The IRA owner can exclude the amount of the QCD from his or her gross income (thereby reducing their adjusted gross income), but any donation made via a QCD is not eligible for a charitable deduction. From a tax perspective, an exclusion from income is preferable over a deduction from income — particularly for those who don’t meet the itemized deductions threshold in the first place.

As with many IRS provisions there are a number of fine print items to keep in mind.

  • You’re only eligible to make a QCD if you are 70½ or older.
  • Contributions can only be made to 501(c)(3) charities and 170(b)(1)(A) organizations.
  • Donor advised funds and private non-operating foundations are not eligible to receive QCDs.
  • The QCD must be made directly from your IRA to the desired charity, meaning the check issued from your IRA must be payable to the organization. If the check is made payable to you, then it counts as taxable income and will be considered a normal IRA distribution.
  • The QCD can be made from any IRA. SEP and SIMPLE IRAs are only eligible if they are not receiving employer contributions in the same year as the QCD is made. You cannot make the QCD from any employer retirement plans, such as a 401(k), 457 or 403(b), etc.
  • The QCD cannot be a split-interest gift, meaning 100% of the gift must go to a single charity and the gift cannot be shared with the donor or any other designee of the donor (for example, Charitable Remainder Trusts or Charitable Lead Trusts would not qualify). The donor cannot receive any economic benefit as part of the gift.

If you are interested in making a donation directly from your IRA to a charity, please reach out to your advisor to get started and make 2016 a year of giving!

A Win-Win for the Charitably Inclined with IRA Assets

iStock_000072625963_DoubleGenerally speaking, investors have separate retirement and non-retirement accounts. In most cases, the retirement accounts are split between Traditional IRAs (i.e., Rollover, SEP, Simple, 401(k), 403(b), 457, etc.), which are pre-tax dollars, and Roth IRAs, which are after-tax dollars. Non-retirement accounts include trusts, individual accounts and joint accounts.

Upon the owner passing, non-retirement accounts usually receive a step-up in their cost basis, meaning long-term capital gains are wiped out for that person’s heirs. In most circumstances, heirs could rebalance or cash out the portfolio and owe little or no capital gains taxes.

Roth IRAs maintain their tax-free growth and withdrawal nature, but do require annual required minimum distributions (RMDs). Pre-tax IRAs, however, behave differently. While they will maintain their tax-deferred growth advantage, their annual RMDs are 100% taxable as ordinary income. If the beneficiary is in the 25% marginal tax bracket, for example, then a $20,000 Traditional (Beneficiary) IRA distribution will owe $5,000 in federal income taxes. Often these distributions push the beneficiary into a higher tax bracket.

Since non-retirement accounts and Roth IRAs are more tax-friendly for heirs, it may be worth considering the possibility of naming a nonprofit organization, like an alma mater or favorite charity, as the beneficiary of Traditional IRA assets. Instead of heirs paying ordinary income taxes on future distributions, the nonprofit organization will be able to utilize 100% of the assets for their organization’s purposes because they are tax-exempt and won’t owe any taxes on distributions. This is especially attractive for those who are charitably inclined and are trying to determine which asset is best. Other benefits include that your estate will be reduced by the amount of the bequest (possibly reducing or removing any estate taxes owed), and your heirs will receive the most tax-friendly assets.

Each client’s circumstances are different, so we recommend you discuss this with an advisor to see if it makes sense for you and your family.

Seahawks, Merriman and Bowling

We recently had the opportunity to be the title sponsor for Merriman Live Bowl United Presented by Team Avril, a bowling tournament for all ages and skill levels hosted by Seattle Seahawk Cliff Avril. He was joined by several of his teammates: Red Bryant, Brandon Mebane, Michael Bennett and Clinton Mc Donald.

DMerrimanSeahawksuring this fun evening, a few Merriman clients and employees got to hang out with some Seahawks and show off their bowling skills at West Seattle Bowl. I think I threw more gutter balls than strikes, but that did not matter because the evening was about having fun and supporting a great nonprofit organization.

Net proceeds benefited United Way of King County and Strikes for Kids, a nonprofit organization that partners with professional athletes in bringing local business, fans, children and sports together for great causes. There is no better feeling seeing the excitement that the children have to meet their favorite Seahawk while having fun with their family. Strikes For Kids coordinates these bowling and golf tournaments across the United States. We were thrilled and honored to sponsor this first event in the Seattle area.

Below are some links to check out video coverage and photos from this event. Go Hawks!

Seahawks video

Komo News coverage

Live Bowl United

 

 

Maximizing the impact of charitable contributions

With the recent tornado in Oklahoma we are reminded of the importance of charitable giving.  In fact, since the tornado, over $15 million has been donated to the American Red Cross. According to the Giving USA Foundation, individuals gave over $217 billion dollars to charitable causes in 2011, a 3.9% increase over 2010. As charitable giving increases, I want to make sure you know not only how to maximize your charitable contributions from a tax standpoint (see my post about using the donor advised fund), but also that you are informed about the effectiveness of the charities you choose.

There are a couple resources available now to help understand how effective a charity is with the money you donate. Charity Navigator has been around since 2001 and now assesses over 6,000 charities. Its goal is to provide one overall rating based on two areas of effectiveness: 1) their financial health and 2) their transparency and accountability. For example, the American Red Cross, a popular one at this moment, shows a total score at 59.64 out of 70 as of fiscal year end in June of 2011.

Another website, CharityWatch.org, also rates different charities’ effectiveness. While they rate only 600 or so of the largest charities, they tend to dig much deeper into the inner workings of the organization than Charity Navigator. They study the individual finances of every charity to give a clear picture on what the money is actually being used for. Instead of taking the information at given at face value, they try to determine if the donors’ objectives are actually being met. Because their analysis is more in-depth, Charity Watch charges $50/year for access to their Charity Rating Guide, which provides financial data and a rating from “A+” to “F” for each charity.

We all want to make sure the money we give generously is used effectively. Whether you’re giving funds to aid with large natural disasters or donating to your local food bank, donations are needed and greatly appreciated. Now, in addition to maximizing the tax effectiveness of your charitable donations through donor advised funds, these tools can help you choose organizations that will help your dollar have maximum impact.

Charitable IRA distributions renewed for 2013

We have great news for people making charitable gifts this year! Thanks to the American Taxpayer Relief Act of 2012 (ATRA), IRA owners can once again make a qualified charitable distribution (QCD) from an IRA to a qualified charity of their choice.

For those who are charitably inclined, a QCD can really maximize the effectiveness of charitable gifts.

Here’s how it works:

For this year, IRA owners who are 70 ½ or older and would otherwise have to satisfy a required minimum distribution from an IRA may donate any portion up to $100,000 of the required distribution directly to a qualified charity(ies). Additionally, the IRA owner can exclude the amount of the QCD from his or her gross income on their 2013 tax return. The amount of the QCD excluded from the gross income is not included when determining any deductions made to qualified charitable organizations.

As with many IRS provisions there are a number of fine print items to keep in mind.

  • You are only eligible to make a QCD if you are 70-½ or older.
  • Contributions can only be made to 501(c)(3) charities and 170(b)(1)(A) organizations.
  • Donor advised funds and 30% public foundations are not eligible to receive the QCDs.
  • The QCD must be made directly from your IRA to the desired charity, meaning that the check issued from your IRA must be payable to the charity. If the check is made payable to you, then it counts as taxable income and will be considered a normal IRA distribution.
  • The QCD can be made from any IRA. SEP and SIMPLE IRAs are only eligible if they are not receiving employer contributions in the same year as the QCD is made. You cannot make the QCD from any employer retirement plans, such as a 401(k), 457 or 403(b), etc.
  • The QCD cannot be a split-interest gift, meaning that 100% of the gift must go to a single charity and the gift cannot be shared with the donor or any other designee of the donor. The donor cannot receive any economic benefit as part of the gift.

At this time, the QCD provision is only extended through the end of 2013. We do not know if the provision will be renewed in years beyond. If you are interested in making a donation directly from your IRA to a charity, reach out to your advisor to get started and make 2013 a year of giving!

Charitable giving: Donor-Advised Funds

If you are like me, then you receive lots of invitations to donate to your favorite charities. There are natural disaster funds, religious contributions, education, health, and many other non-profit groups that look to individuals for funding. According to the Giving USA Foundation, individuals gave an estimated $211.77 billion in 2010, a 2.7% increase from 2009. Since this is an important topic to many people, it is good to be informed on the most effective ways to give to your favorite charities.

One common way to contribute to charities is to give cash. This is simple, and charities can easily handle the different contribution levels. The downside is that you may have to sell an asset (stock, bond, mutual fund) in order to free up the cash you intend to donate. Usually, when you sell something, there are tax consequences to doing so. For example, if you had a stock worth $10,000 and the basis was $5,000, you would create a tax consequence by selling and would likely have less than the full $10,000 to give to the charity. (more…)