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Tax Strategies for Charitable Donations

This time of year we are more apt to count our blessings and give some of what we have harvested to others in need.  One of the most popular charitable income tax breaks of the last several years is the ability for those age 70 ½ or older to make charitable gifts of up to $100,000 directly to a charity from an individual retirement account and have it treated as part of one’s annual required minimum distribution – a qualified charitable distribution (“QCD”).  The law allowing QCDs expired at the end of 2014 and many have wondered whether the law would be extended for 2015.  The Consolidated Appropriations Act of 2016, signed by President Obama last week, includes a permanent extension of this popular income tax break.  Using this strategy reduces one’s adjusted gross income, which is a trigger for many things such as net investment income tax, phase-out of exemptions and itemized deductions, and Medicare premiums and allows those taxpayers who do not itemize their deductions to benefit from it as well.

If you make charitable donations, especially if you are younger than 70 1/2, another strategy to consider is a donor-advised fund (“DAF”).  This is a less expensive alternative to a family foundation, easier to administer and allows you to benefit more than one charity.  Utilizing a DAF allows you to separate the tax deduction from the charitable distribution.  You can contribute to the fund in a higher income year when your marginal tax rate is high, get a current tax deduction, and distribute the money to charities in future years.  The assets inside the fund grow tax-free, but must be used to make donations to IRS-approved public charities.  Contributions to DAFs can include cash, publicly traded securities, real estate and life insurance policies.  The minimum amount necessary to open a DAF at Schwab is $5,000.  Either strategy – the use of a QCD or a DAF – is a win-win for the taxpayer and charitable organizations.

Written by

Gregory C. Luke, ESQ.

Greg joined THOR in 2002 and is a member of the Wealth Management team. Before joining THOR, Greg spent 12 years in the private practice of law. While practicing law, Greg's main focus was business and estate planning, tax, charitable planning and estate administration.

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