By Joe Cicchinelli, IRA Technical Expert
Follow Me on Twitter: @JoeCiccEdSlott
In the current debate over the upcoming fiscal cliff, limiting income tax deductions is being discussed as a way to increase federal tax revenue. Charities could be adversely affected.
When you give money to a charity, you get a tax deduction when you itemize your deductions. If income tax deductions are limited or capped, an idea that has surfaced in the debate over the fiscal cliff, charities could be negatively impacted. Limiting charitable deductions could discourage contributions to charities, in some cases substantially.
As our government’s role in providing a safety net may shrink, the demand for services provided by charitable organizations will grow. In our current economy, many charities have seen large increases in demand for services such as emergency housing, food and family services. Budget cuts that reduce funding from the government will further exacerbate this problem.
Very few people argue that charitable deductions should be eliminated. The problem is that they reduce federal tax revenue by about $40 - 50 billion per year. They are being eyeballed for cuts along with the mortgage interest deduction and the state/local income tax deduction. While you must pay mortgage interest and state income taxes whether you get a deduction or not, you don’t have to give to charity. Charitable giving is completely optional.
President Obama would cap charitable deductions for people in the highest income-tax bracket at 28%, down from 35% now. That would affect individuals with incomes of about $200,000 and couples with incomes of $250,000 or higher. As a result, many charities are encouraging donors to give more this year in case the charitable deduction is reduced.
Although the special tax break for charitable IRA rollovers, known as “qualified charitable distributions” (QCDs) expired in 2011, Congress has discussed renewing it, but has not done so yet. QCDs allowed IRA owners or beneficiaries who are actually 70 ½ years old or older to directly transfer up to $100,000 per year from their IRA (tax-free) to a charity. QCDs can be used to satisfy your required minimum distribution (RMD) from your IRA.
To lock in the favorable tax benefits of a QCD, some advisors have recommended that you consider making an IRA transfer directly to a charity in 2012 in case QCDs are retroactively renewed, especially if you were planning on giving to a charity anyway. For example, if you haven’t taken your RMD yet, consider sending the RMD amount directly from your IRA to the charity. If QCDs are not reinstated, you’ll be in the same position you would have been in if you had actually received your RMD and then made a charitable contribution. The IRA distribution is taxable but you get a charitable deduction if you itemize. There is no downside risk to doing so. On the other hand, if QCDs are retroactively reinstated, you’ll be in a better position because your RMD will be satisfied through a tax-free QCD.
- One challenge of the fiscal cliff is raising revenue without discouraging donations to charities
- Using your IRA for charitable giving is taxable unless Congress retroactively reinstates qualified charitable distributions (QCDs)