December 12, 2016
When funds are drawn out of retirement plans and IRAs by noncharitable beneficiaries, federal income tax of up to 39.6% will have to be paid. State income taxes also may be owed. Furthermore, retirement funds possessed at death may be subject to substantial federal estate tax and state death tax.
Retirement benefits are to be contrasted with other assets that can be passed to noncharitable beneficiaries (a spouse or children) free of income tax. For example, an individual inheriting stock worth $300,000 from his parent (that was purchased by the parent for $100,000) won't have to pay income tax on the $200,000 appreciation. That's not the case for retirement benefits. They are subject to both income tax and estate tax. A special income tax deduction for the estate tax helps noncharitable beneficiaries but the combined income and estate tax can still be quite substantial.
Because of this double tax bite, someone who plans to make charitable gifts should consider naming a charity as beneficiary of his IRA or retirement plan to gain these advantages:
For someone not able to leave her entire retirement benefits to a charity, there are these options:
Another popular way to transfer IRA assets to charity is via a tax provision which allows IRA owners who are 70-1/2 years old or older to direct up to $100,000 of their IRA distributions to charity. The money given to the charity counts toward the donor's required minimum distribution, but doesn't increase the donor's adjusted gross income (AGI) or generate a tax bill. Keeping the donation out of the donor's AGI is important because doing so
(1) helps the donor qualify for other tax breaks (for example, having a lower AGI can reduce the threshold for deducting medical expenses, which are only deductible to the extent they exceed 7.5% of AGI (10% of AGI for people under age 65 and for everyone after 2016));
(2) reduces taxes on the donor's Social Security benefits, and
(3) helps the donor avoid a high-income surcharge for Medicare Part B and Part D premiums (which kick in if AGI is over certain levels).
If you would like to discuss any of these techniques, please call our office today.
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