Philanthropic US taxpayers should greet the Tax Increase Prevention Act of 2014 with holiday cheer. The law extends several expired tax provisions for 2014 only—including qualified charitable IRA distributions. But other giving strategies may make some taxpayers merrier come tax time.
Qualified Charitable Distributions: The Best Alternative?
Signed into law on December 19, the Tax Increase Prevention Act of 2014 law allows IRA owners above 70.5 years to donate up to $100,000 directly from their IRA to a qualified public charity (but not donor-advised funds, supporting organizations, and private foundations) before January 1, 2015.
The gift counts toward the donor’s Required Minimum Distribution amount, but not toward federal Adjusted Gross Income (AGI). Because the gift is excluded from AGI, there is no charitable income-tax deduction; instead, the qualified charitable distribution avoids tax on embedded income from an IRA distribution. By contrast, a gift of appreciated stock avoids tax on embedded capital gains and also provides a current-year charitable tax deduction.
Qualified charitable distributions will benefit many donors, especially those who have exceeded the annual limitation on charitable income-tax deductions or who do not itemize deductions. But for other taxpayers, a gift of appreciated stock provides a larger overall tax benefit. Donors should review all of their options with their tax advisor before taking action.
For a donor in the top federal income tax bracket, a $100,000 gift from an IRA to charity will avoid $39,600 in embedded tax, which would reduce the donor’s effective cost of the gift to just $60,400 as illustrated in the Display below.
The display also demonstrates that a cash gift would result in the same economic benefit, assuming the donor could take full advantage of the charitable income-tax deduction in the current year. That’s a big assumption for donors who face deduction limits, so the qualified charitable distribution may be the best strategy if a donor’s only other option for a gift is cash.
Giving Appreciated Stocks
The combined benefit of avoiding the capital-gains tax and creating a charitable tax deduction can be larger than the benefit of the qualified charitable distribution, if the donor can take the charitable income-tax deduction. Many investors who bought stock over a year ago have large embedded gains that they can avoid by transferring the stock(s) to charity. In addition, a stock gift is more flexible than a qualified charitable distribution, because appreciated stock can be given to charitable entities that are excluded from the IRA charitable rollover, such as private foundations or donor-advised funds.
Whether a donor plans to give stock or make a qualified charitable distribution, time is running out. Charitable gifts must be made by December 31, 2014, to count for the 2014 tax year. In addition, qualified charitable distributions from an IRA were extended only for 2014; Congress will need to act again to extend for 2015 or make this provision permanent.
Bernstein does not provide tax, legal, or accounting advice. In considering this material, you should discuss your individual circumstances with professionals in those areas before making any decisions.