2014 Giving Guide: BKD CPAs & Advisors

Charitable-minded individuals should be aware of the numerous tax advantages that can come with donating qualified retirement plan and individual retirement account (IRA) benefits to a charity.


Noncharitable beneficiaries that draw funds out of retirement plans and IRAs have to pay federal income tax of up to 39.6 percent, and they might also owe state income taxes. In addition, retirement funds possessed at death could be subject to substantial federal estate tax and state death taxes.

Retirement benefits are to be contrasted with other assets that can be passed to noncharitable beneficiaries free of income tax. For example, an individual inheriting stock worth $300,000 from his parents—stock purchased by the parent for $100,000—won’t have to pay income tax on the $200,000 appreciation in value. That’s not the case for retirement benefits, which 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 still can be quite substantial. Because of this double tax bite, those who plan to make charitable gifts should consider naming a charity as beneficiary of their IRA or retirement plan to gain the following potential advantages:

• The retirement benefits going to the charity won’t be subject to federal estate tax and generally won’t be subject to state death taxes.

• The estate won’t be considered to receive taxable income when benefits are paid to the charity.

• The retirement account owner’s surviving spouse, children and others who may be beneficiaries of the estate won’t be considered to receive taxable income when the retirement benefits are paid to the charity.

• The charity won’t have to pay federal income tax on distributions from the qualified plan or IRA and generally won’t have to pay state income taxes.


For those not in a position to leave all of their retirement benefits to charity, there are options:

• An individual with two or more retirement plans, e.g., an IRA and a profit-sharing plan or two IRAs, can leave one to a charity and the other(s) to family members.

• An individual with a single IRA can split it into two IRAs and leave one to a charity. This potentially can be achieved tax free through a rollover or a trustee-to-trustee transfer.

• A married individual can have benefits paid to a spouse’s qualified terminable interest property (QTIP) trust, with a charity receiving the benefits that remain at the death of the surviving spouse. The marital deduction will shield the benefits from estate tax when the individual dies. When the surviving spouse dies, the remaining benefits will go to the charity free of estate and income tax.

• An individual’s will can establish a charitable remainder trust at death to provide a noncharitable beneficiary with a fixed annuity for a set number of years (not to exceed 20) or for life, with the remainder going to charity.


Another popular way to transfer IRA assets to charity is via a tax provision that allows IRA owners who are 70 1/2 or older to direct up to $100,000 of their IRA distributions to charity. Although this provision expired last year, it is expected to be extended for 2014, along with several other so called “extenders.” 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 helps the taxpayer do all of the following:

1. Qualify for other tax breaks, e.g., reducing the threshold for deducting medical expenses, which are only deductible to the extent they exceed 10 percent of AGI

2. Reduce taxes on his or her Social Security benefits

3. Avoid a high-income surcharge for Medicare Part B and Part D premiums, which kicks in if AGI is above certain levels.

 

Each individual tax situation is unique. Consultation with a knowledgeable tax advisor is always recommended before making final decisions.

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This information was written by qualified, experienced BKD professionals, but applying specific information to your situation requires careful consideration of facts and circumstances. Consult your BKD advisor before acting on any matter covered here.