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2013 Tax Free IRA Distributions to Charity May Result in Even Greater Tax Savings

October 22, 2013

Mary E. Hoyt, CPA

Since 2006, individuals who were required to make distributions from their Individual Retirement Accounts (IRAs) (age 70 ½ and older) could make Qualified Charitable Distributions (QCD). QCDs are payments (up to $100,000) made directly from an IRA to a qualified public charity. These payments satisfy the taxpayer’s minimum distribution requirements.  Since the distribution is not included in the taxpayer’s income, the charitable deduction is not allowed either.

Prior to 2013, Connecticut taxpayers saw immediate tax savings from this approach since it lowered their adjusted gross income (AGI), which is the basis on which Connecticut tax is calculated.  Savings were also evident for taxpayers who had charitable contribution deductions limited due to AGI levels as well as taxpayers affected by AGI threshold limitations, such as the phase-out of the $25,000 rental real estate loss exception, and the reduction of medical expenses and miscellaneous itemized deductions.

In 2013, there is an added incentive to consider making Qualified Charitable Distributions.  Under the current tax laws, Adjusted Gross Income plays a key role in determining which taxpayers will be required to pay additional taxes and which taxpayers will lose tax benefits from personal exemptions and itemized deduction limitations.   Accordingly, tax planning which reduces an individual’s AGI could result in even greater tax savings.

The Health Care and Education Reconciliation Act of 2010 (commonly called ObamaCare) imposes a Medicare contribution tax, referred to as the Net Investment Income Tax (NIIT), on high income taxpayers.  The NIIT is 3.8% of the lesser of net investment income or the excess of modified adjusted gross income over the threshold amount.  The threshold amounts are $250,000 for married taxpayers filing jointly, $125,000 for married taxpayers filing separately and $200,000 for unmarried taxpayers and heads of household.  Net investment income is non-business income which includes, but is not limited to, interest, dividends, capital gains, and other passive income.

The Personal Exemption Phaseout (PEP) and the Limitation on Itemized Deductions (PEASE–named after the author of the idea) have been reinstated beginning in 2013. Both of these limitations apply to individuals who have Adjusted Gross Income with a starting threshold of $300,000 for married taxpayers filing jointly, $275,000 for heads of household and $250,000 for unmarried taxpayers. Under PEP, the total amount of personal exemptions that can be claimed by a taxpayer is reduced 2% for each $2,500 (or portion thereof) by which the taxpayer’s AGI exceeds the applicable threshold. For taxpayers subject to “PEASE” limitations, the total amount of itemized deductions is reduced by 3% of the amount by which the taxpayer’s AGI exceeds the threshold amount, with the reduction not to exceed 80% of the amount of the itemized deductions otherwise allowable for the taxable year.

Given the added emphasis on Adjusted Gross Income under the new tax legislation, it makes sense to plan accordingly.  A Qualified Charitable Distribution could save you more taxes in 2013 than ever before.

Mary E. Hoyt, CPA, is a partner with BlumShapiro, the largest regional accounting, tax and business consulting firm based in New England, with offices in Connecticut, Massachusetts and Rhode Island. The firm, with 360 professionals and staff, offers a diversity of services which includes auditing, accounting, tax and business advisory services. In addition, BlumShapiro provides a variety of specialized consulting services such as succession and estate planning, business technology services, employee benefit plan audits, litigation support and valuation and financial staffing. The firm serves a wide range of privately held companies, government and non-profit organizations and provides non-audit services for publicly traded companies.

Disclaimer: Under U.S. Treasury Department guidelines, we hereby inform you that (1) any tax advice contained in this communication is not intended or written to be used, and cannot be used by you, for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service (or state and local or other tax authorities), and (2) no part of any tax advice contained in this communication is intended to be used, and cannot be used, by any party to promote, market or recommend any transaction or tax-related matter(s) addressed herein without the express and written consent of Blum, Shapiro & Company, P.C.


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