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Year-End Tax Planning with Charitable Contributions

While most high net income/high net worth individuals expect that their 2013 tax bill will be higher than 2012, most will likely be shocked by the increase.

The American Taxpayer Relief Act of 2012 increased the highest marginal individual income tax rate from 35 percent to 39.6 percent. In addition, many taxpayers will be subject to additional Medicare taxes on Net Investment Income and Earned Income courtesy of the Patient Protection and Affordable Care Act of 2010. Accordingly, year-end income tax planning strategies in 2013 require careful consideration of taxable income in relation to the various thresholds, which, if exceeded, may elevate a taxpayer into the higher marginal income tax brackets.

Contributions to charity continue to be deductible for both regular tax and AMT. The income limitations for deducting charitable contributions remain unchanged and charitable contributions in excess of annual income limitations remain available to carry over for up to five years. 

In most situations, a contribution of appreciated long term capital gain property to charity is preferable to giving cash.  This is because you get to deduct the fair market value of the property contributed and you don’t have to pay tax on the unrealized appreciation. Keep in mind that if your contribution is of property valued over $5,000, other than marketable securities, you will absolutely need a timely appraisal or your charitable deduction will be disallowed.

The American Taxpayer Relief Act of 2012 extended through calendar year 2013 the Qualified Charitable Distribution (QCD) provision which allows a taxpayer age 70 1/2 or older to transfer up to $100,000 directly from his IRA to a qualified charity. Without this provision in the law, a charitable contribution made from the IRA would be treated first as a distribution from the IRA, which would be recognized as taxable income, and then as a charitable contribution, deductible within limits, as an itemized deduction. Remember that the QCD can satisfy your Required Minimum Distributions (RMDs) for this tax year.

The American Taxpayer Relief Act of 2012 also reinstated the "Pease limitation," which limits the amount of itemized deductions a taxpayer can claim. The reinstatement of the Pease limitation phases out itemized deductions by 3 percent of every dollar of adjusted gross income over a threshold.  In extreme cases, for taxpayers with very high taxable income, the Pease limitation can have a material impact on the income tax benefit of charitable deductions.

Please consult with your tax advisor to determine how these provisions may apply to your own unique tax situation.

Remember, contributing to a local charity provides personal satisfaction for you and is an opportunity to make a difference in your community. In addition, your gift may reduce the amount of taxes you owe! Parasol is here to help with the charitable portion of your year-end giving and to make your giving simple and effective.  We can offer a range of solutions to address both your tax concerns and charitable intentions.

Year-end Tax Planning with Charitable Contributions is provided by George Ashley of Ashley Quinn, CPAs and Consultants, Ltd., at www.ashleyquinncopas.com



 

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