Tag: charitable donations

IRAs to Charity: A Useful Estate Planning Technique

Make your favorite charity a beneficiary of your IRAsSave taxes with this smart estate planning strategy

If you’re like many people, you have a great deal of your wealth tied up in traditional IRA accounts. Why? The tax-free benefits have motivated you. But there’s going to come a time when you—or your heirs—will have to pay taxes on this money. Instead of worrying about what you’re going to do about that, you can follow a tax-saving strategy that considers designating your favorite charity or charities as beneficiaries of all or a portion of your IRAs. Then you can leave other assets to family members and other heirs.

IRAs and estate taxes

Your IRAs are considered part of your estate when you die, which means they are subject to estate taxes. Although very few people are subject to the federal estate tax, some states have lower thresholds for estate taxes. Also, your heirs will have to eventually withdraw the funds, and typically will pay income tax. This could be substantial, if your heirs are already in a high bracket.

Fortunately, there’s a tax-smart solution: leave some or all of your IRA to charitable beneficiaries while leaving other assets to heirs of your choice. Leaving money directly to charities by designating them as account beneficiaries is very tax-efficient. First, it avoids estate tax, since the IRA is removed from your estate. Second, there’s no federal income tax due on IRA money. (You may get a state tax break too.) No income taxes are due when your favorite tax-exempt charities make withdrawals from the IRAs.

This strategy allows you to leave more to your favorite charities and more to your loved ones while keeping as much as possible from the IRS.

Leave Roth IRAs to your loved ones

One final word, however. This strategy generally applies to traditional IRAs. Naming a charity as the beneficiary of your Roth IRA is generally inadvisable. Leave Roth balances to your loved ones by designating them as account beneficiaries. Why? As long as your Roth IRA has been open for more than five years before withdrawals are taken, all withdrawals will be federal income tax-free since the money went in after taxes. But if you leave Roth IRA money to charity, this tax break is wasted. (Roth IRA inheritance rules differ from the rules for traditional IRAs in several key ways.)

Looking at the Big Picture

Of course, this is just part of your estate plan, and there are lots of complexities. A giving strategy that makes sense for one family may not be appropriate for another. Also, the new tax law has changed the scenario for many.  Finally, there are various limits and provisions you should be aware of before you proceed.

The bottom line? Talk to a qualified financial professional about your charitable goals and any traditional or Roth IRAs you have in order to take care of both your family and your designated nonprofits in as efficient a way as possible.

We’ve got your back on estate planning

It’s never too early to start thinking about estate planning. KRS CPAs offers unbiased financial and tax guidance to help you realize your specific goals and vision. Contact KRS managing partner Maria Rollins at [email protected] or 201.655.7411 to discuss your situation.

Tax Planning Strategies – Minimizing 2016 Individual Income Taxes

It is never too early to get a jump start on tax planning. Why not start now and minimize your end of the year holiday stress? These tax planning techniques could help you reduce 2016 taxes.

Make Charitable Contributions

Tax planning strategies for 2016Making charitable contributions is a great way to reduce your taxable income. The most common type of donation is a monetary contribution. Taxpayers are allowed to make tax deductible monetary contributions to qualified organizations in amounts up to 50% of adjusted gross income.

Additionally, donating securities is an excellent way to support a charitable organization and avoid paying capital gains tax.  When you donate securities that were held for more than one year, the contribution is deducted at fair market value and capital gains tax is avoided.  This strategy works best with appreciated securities.  Unlike monetary charitable contributions, donating securities to qualified organizations are limited to 30% of adjusted gross income.

Plan for Capital Gains

If capital gains are expected to be significant in 2016, consider selling some securities in your portfolio at a loss and generate capital losses. Capital losses are netted against capital gains to calculate the net taxable amount. Furthermore, if capital losses exceed capital gains, taxpayers may take a capital loss deduction up to $3,000 in the current year and carry forward the remainder to future years.

For example, if a taxpayer sells two securities, one with a gain of $50,000 and one at a loss of $65,000, a $3,000 capital loss deduction is allowed in the current year. The remaining $12,000 capital loss is carried forward to the following year.

Avoid Alternative Minimum Tax

The alternative minimum tax (AMT) has a significant impact on tax planning for high income individuals.  AMT limits certain benefits and itemized deductions you might otherwise be eligible to receive. In years where taxpayers will be subject to AMT, one strategy is to accelerate income or defer tax deductions. This will help avoid AMT either in the current year or over multiple years.

For example, if you are subject to AMT and will not receive any benefit for state tax payments in the current year, defer those payments, if possible, to the next year when you’re not subject to the AMT.

If you’re not in the AMT for the current year, pay any state taxes before the end of the year, which may be due in April, to accelerate the year of the tax deduction. The IRS has the following tax tool to help determine if you might be taxed under AMT (https://www.irs.gov/individuals/alternative-minimum-tax-assistant-for-individuals).

Prepay Deduction Items

Another way to reduce taxable income in 2016 is to prepay 2017 real estate taxes, state and local income taxes, and other miscellaneous itemized deductions.  Itemized deductions are recognized in the year they are paid, not the year they are due. If a taxpayer itemizes and has the option to accelerate 2017 expenses to 2016, this will increase deductions in 2016 which will decrease adjusted gross income.

Before implementing this strategy confirm you will not be subject to the AMT and your overall itemized deductions will be greater than the standard deduction. You should also consider itemized deduction limitations that may be greater due to higher income in 2016.

You may benefit from implementing at least one of these tax planning strategies. They are just a few of the methods to reduce taxable income and should be implemented on a case-by-case basis. At KRS we work with our clients to develop fluid tax plans and minimization strategies.

If you would like to learn more about tax planning and how to implement strategies to reduce your taxes, please contact Maria Rollins, CPA, to set up a consultation.