Friday December 13, 2013
Individuals have the option to donate funds from their individual retirement to charity. This is a special tax break called a Qualified Charitable Distribution, and this provision expires at the end of 2013. Here's how it works.
A qualified charitable distribution is a distribution of funds from an individual retirement account (IRA) directly to a 501(c)(3) charitable organization. Individuals age 70.5 years old or older are permitted to make such distributions. The distribution occurs by being directly transferred to the charity from the IRA trustee.
What's the tax benefit? Qualified charitable distributions from an IRA are not included in the taxpayer's taxable income, and the taxpayer does not take a deduction for the charitable donation. Up to $100,000 per year may be treated as a tax-free qualified charitable distribution. Further, qualified charitable distributions satisfy the required minimum distribution rules.
Qualified charitable distributions are a tax-efficient way for higher-income seniors to donate to charity. Since the income from the distribution doesn't show up on the tax return, this keeps total income and adjusted gross income lower than they would be if a normal distribution were taken and the cash subsequently donated to charity. By keeping total income lower, this can prevent a higher portion of Social Security benefits being included in taxable income. And by keeping adjusted gross income lower, this can help manage AGI-sensitive thresholds for the medical expense deduction and for the 3.8% net investment income tax.
Thursday December 12, 2013
Individuals may want to consider donating to charity any long-term stocks, bonds or mutual funds that have appreciated in value.
Here's why. If a person gives long-term, appreciated investment securities to a qualified charity, the person avoids having to include the capital gain income on her tax return. This keeps income and adjusted gross income lower compared to if the person sold her investment. Plus, the person gets a charitable deduction for the fair market value of the donation. Bottom lime: no income plus a deduction.
This strategy only best if the investment has been held more than one year (that is, it has a long-term holding period) and the investment has increased in value from when it was originally acquired.
This strategy may be particularly useful to higher-income people who are or might be subject to the new 3.8% net investment income tax. That 3.8% surtax is triggered if a person's adjusted gross income (with some technical modifications) is over $200,000 for single persons or over $250,000 for married persons filing jointly. This strategy can help keep adjusted gross income lower than it would otherwise be if the person had first sold her investment and then given cash to the charity.
Wednesday December 11, 2013
Individuals may want to consider whether selling investments that have appreciated in value before the end of the year. Selling off profitable investments increases income taxed in 2013, but there are some ways that some of those profits can be tax-free.
Taxpayers in the two lowest tax brackets of 10% and 15% may especially want to consider selling profitable long-term investments. The 15% tax bracket ends at $36,250 of taxable income for single filers and at $72,500 of taxable income for married couples filing jointly using the 2013 tax rates. Taxable income means total income after various deductions have been subtracted, such as the standard deduction and personal exemptions.
Long-term gains are taxed at zero percent to the extent that those long-term gains fill up taxable income to the top of the 15% bracket. Long-term gains are taxed at 15% for taxpayers who fall in the 25%, 28%, 33%, or 35% tax brackets. And long-term gains are taxed at 20% for taxpayers who fall in the top tax bracket of 39.6%. Short-term gains are taxed at the ordinary tax rates and are not eligible for the lower long-term gains rate. Short term means an investment has been owned for one year or less; long term means an investment has been owned for more than one year.
What we're looking for is the opportunity to sell long-term investments at a profit and have those profits taxed at zero percent. How would this work? Let's take an example. Read More...
Tuesday December 10, 2013
Individuals may want to evaluate their investment portfolio before the end of the year whether to sell off any investments that have lost value in an effort to book capital losses for this year.
From a tax perspective, higher-income people may find that their investment income, including capital gains, is subject to the new 3.8% Net Investment Income Tax. Higher-income people also face higher tax brackets with a new 20% rate on long-term gains for people in the 39.6% tax bracket, while short-term gains are subject to the ordinary tax rates which could be as high as 39.6%. Selling investments that have lost value can help lower the amount of net gain subject to the income tax and the net investment income tax.
From a non-tax perspective, the end of the year may be a good time to take evaluate your investments and how they are performing. "Are you satisfied with their performance compared to the rest of the market?," is a crucial question, according to Deborah Fowles (About Financial Planning, How To Do An Annual Financial Checkup). You may also want to adjust your investment strategies, and here I'd recommend reviewing the Eight Secrets to Improving Your Portfolio Returns from Joshua Kennon (About Investing for Beginners). Read More...