• / Free eNewsletters & Magazine
  • / My Account
Home>Practice Management>Practice Builder>Begin Your Year-End Charitable Planning Now

Related Content

  1. Videos
  2. Articles

Begin Your Year-End Charitable Planning Now

Here are the steps you should take now with clients to avoid the holiday rush.

Helen Modly, 11/02/2006

It happens every year. In the few hectic days right before or right after the holidays, your client suddenly wants to gift some stock to their favorite charity. A laudable goal, but last minute, end-of-year transfers of stock are transactions just begging for cashiering problems. This year may be especially troublesome as some clients will be exploring the gifting of IRA assets based on the provisions in this year's new tax law. A word to the wise, get ahead of this train or your holiday may be less than merry.

Get Ahead of the Curve by Looking Back
Clients that give appreciated stock usually do so every year. Go through your records for last year and identify which clients are likely to be interested in making stock gifts and call them, now. Explain that with the market in record territory, now is the time to make those gifts to lock in their tax deduction at today's market prices. Most clients will appreciate the suggestion, and you'll find that you can initiate these gifts now and have them completed before the end of the month.

A Special Opportunity for This Year and Next
While you are looking through those client files, look for anyone who will reach the age of 70 ½ before the end of the year and has an IRA. The new tax law enables these taxpayers to make a direct transfer from their IRA to a qualified charitable organization of up to $100,000 for tax years 2006 and 2007. Roth IRAs are also eligible, but I think it is a waste to give away funds that will never be taxed if there are any other funds available.

Your clients may ask, "Why would it be better to send my charitable contribution directly from my IRA, instead of taking my IRA distribution and then writing the check for my charitable contribution like I've always done?"

The answer lies in looking at their tax return. A distribution from an IRA raises the taxpayer's adjusted gross income (AGI) by the amount of the distribution. Even with a corresponding charitable deduction (assuming your client takes itemized deductions rather than the standard deduction), the higher AGI could cause their social security income to become taxable, trigger the threshold for alternative minimum taxation, or increase the level of phase out for schedule A deductions. All of these would cause an increase in tax liability. For clients who don't itemize deductions, there would be no charitable deduction to offset the increased income from taking the taxable distribution from the IRA. Many charitable clients are already maxing out the deduction limits for charitable donations and this technique avoids those limits altogether.

By instructing their IRA custodian to make a payment directly to the charity from the funds in the IRA, clients avoid having to realize the taxable income from the distribution. So, while there is no deduction for the amount transferred from the IRA to charity, the taxpayer is usually ahead by not having the additional taxable income of their return. This charitable distribution will count toward satisfying their required minimum distribution for the year.

As Always, a Bit of Fine Print
This technique has a few strings attached:

  • The tax payer must have reached age 70 ½ at the time of the transfer to the charity.
  • The transfer must be from an IRA or Roth IRA, not a SEP or SIMPLE IRA.
  • The charity must be a qualified organization. This would include a public 501(c)(3) charity, or an operating foundation. Donor advised funds or supporting organizations will not qualify. A private foundation may qualify if it makes the election requiring the full contribution to be distributed in the same year as it was received, in addition to the 5% grant rule.
  • The taxpayer cannot receive any benefit from the charity. No steak dinners, no golf outings, no annuity payments.
  • The taxpayer must receive an acknowledgement from the charity for the gift stating that the taxpayer received no benefit.

Because assets in an IRA are tax-deferred (assuming all contributions were deductible), there is no sense in gifting shares of stock from the IRA. Instead, liquidate the stock and have the custodian send cash to the charity. Be sure to have your client notify the charity that the gift is coming and request an acknowledgement letter. Often charities receive a wire deposit with no information about its source other than the financial institution initiating the wire.

©2017 Morningstar Advisor. All right reserved.