More On Tax Planningfrom The Advisor's Professional Library
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- Health Insurance: Health and Medical Savings Accounts A Health Savings Account is a trust created exclusively for the purpose of paying qualified medical expenses of an account beneficiary. Although they are popular, they are not without their pitfalls and the regulations can be complicated. Learn more about how to avoid federal taxation on the accumulation and distributions of HSA.
Your clients who would like to make a gift to a charity directly from their individual retirement account this year may have to think twice before donating. The tax code provision that allowed IRA owners to contribute up to $100,000 directly from their IRA to the qualified charity of their choice–without recognizing the donation as income–expired at the end of 2011, and Congress has given no indication if it will be renewed.
Your clients need to know the rules as they stand now, or they could be in for an unpleasant surprise during next year’s tax season.
The Pre-2012 Donation Rule
As it existed through December, the “donation rule” worked as follows: an owner of an IRA who was over 70½ could directly transfer IRA funds to the charity of his or her choice without counting the donation as income. Because IRA owners who have reached age 70½ are required to withdraw a certain amount, called a minimum distribution, from their IRA assets each year and count this as taxable income, the donation rule was attractive to clients who wished to minimize income.
Minimizing income is a goal for many IRA account owners aged 70½ and older. Increased levels of income can push retirees into higher tax brackets for Social Security tax purposes, and can also make them liable for higher Medicare payments. Until the end of 2011, it was possible to exclude the entire required minimum distribution from income, assuming that the IRA owner’s annual minimum distribution requirement was below $100,000 and he or she donated the entire amount.
The taxable gifts were not deductible under the pre-2012 provision, but the income-reducing benefits made it a smart choice for many IRA owners.
Donating IRA Funds in 2012 and Beyond
Congress has a history of reinstituting expired tax code provisions and applying them retroactively. It is possible, therefore, that Congress could act at some point this year or next to reinstate the donation rule for gifts made in 2012.
If the account owner is confident that he or she wants to make the donation regardless of the tax treatment, the IRA sponsor can transfer the gift directly from the IRA to the qualified charity. If Congress does act to retroactively reinstate the donation rule, the gift will be excluded from income just as under the pre-2012 rule.
If Congress does not act to reinstate the donation rule, any charitable donation made from your client’s IRA would be treated in the same manner as a gift made from any other source. This means that the distribution from the IRA would be recognized as income by the account owner, and the gift would later be included on his or her tax return as an itemized deduction. While the deduction would offset income, the benefit is not nearly as great as it was when the income was not recognized in the first place.
While your clients can still use their IRA funds to make gifts to charity and receive the same favorable treatment as a gift made from any other source, the income-reducing benefits have changed in 2012. Even though Congress could act to reinstate the rule on a retroactive basis, it is important that you speak with your clients so that they understand the ramifications of the rules.
See AdvisorOne’s Special Report, 22 Days of Tax Planning Advice for 2012, throughout the month of March.