Tag Archives: taxes

Charitable Gifts and the New US Tax Code

Some non-profits reportedly fear a loss of donations after the changes to the US Tax Code last month. Why? Because the standard deduction has been doubled–to $12,000 for a single person or $24,000 for a married couple filing a joint return. That, in turn, may encourage many people to choose the standard deduction rather than itemizing.

Itemizing, it so happens, is the only way that charitable donations can be deducted (but see below on a legal way around this). I’m not quite sure of the logic that the primary reason people give to charity is that they can get a tax deduction. An itemized deduction does reduce taxable income and hence taxes paid–but is that really why people donate? Don’t they care about the programs, services or causes the charity provides or supports?

Anyway, there is one way to give to charity and still pay less in taxes: Give your RMD directly to charity. Here’s the deal: If you had a tax-deferred investment–like an IRA, once you turn 70 1/2, the IRS wants the taxes that you deferred and any earnings on that investment.  So you must take a required minimum distribution (RMD) from that account. It adds to your taxable income. If you have enough deductions (mortgage interest, state property and income taxes, medical expenses and charitable deductions) to exceed that standard deduction, then you itemize. You’d take that RMD, put it in the bank and donate the cash to the charity. If not, read on.

IF you receive that RMD and THEN give it to the charity, it’s taxable.  BUT, if you arrange to have that RMD go directly to the charity–never touching your hands or your bank account, it is not included in your gross income. Voila–your tax deduction survives, in a manner of speaking, and the charity still gets its money.

Talk to the RMD administrator and to the charity to set this up. Don’t want to give all of the RMD to the charity? Arrange for a percentage amount. Most account administrators have flexibility on dates, where the money is going, etc. Never fear that the charity won’t be happy to receive your money and work out the details with you and the administrator.

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Is a Roth Conversion Right for You?

Have you considered or are you wondering about the merits—pros and cons of converting some of your 401 K (or other retirement accounts from which this is permissible–403 b or 457) traditional IRA assets into a Roth IRA? Traditional retirement accounts are based on accumulating earnings on investing pre-tax income you while you are working. The Roth, on the other hand, accumulates earnings on investments from earnings you have already paid taxes on. Surprise—the IRS and you have an understanding—pay me now or pay me later; either way, the tax man gets his due. When you take money out of the traditional account, you pay tax not only on the (tax-deferred) income you invested, but the earnings on those funds as well. With the Roth, on the other hand, not only do you not pay tax on what you invested (because you already paid them), you pay no tax on the earnings either. Continue reading Is a Roth Conversion Right for You?

Sometimes Economists Don’t Make Cents

One would expect an economics professor from Harvard, and a president emeritus of the National Bureau of Economic Research at that, to know whereof they speak on matters of dollars and cents. Martin Feldstein argues that the Obama administration should withdraw its proposal to reduce the charitable tax deduction of higher income (over $250,00 for married couples) donors to 28% from the 33% or 35% benefit they now enjoy. He notes:

“A substantial body of economic research shows that, on average, each 10 percent reduction in the cost of giving raises the amount that a person gives by about 10 percent. ”

Without expressly claiming studies supporting the corollary, he goes on to illustrate that a 10% increase in cost will conversely lower donations. Ironically, his explanation better makes the case for adopting the Obama proposal rather than for defeating it. He points out that the effect of the change from 35% to 28% is a 10.8% increase in the cost of giving. Accordingly, he suggests a donor of $10,000 might reduce his donation to $9,000 or 10%. As a result, the giver would pay $980 more dollars in taxes but save the $1,000 in donation–leaving him ahead $20. He says that:

“This is a hypothetical example, but the responsiveness of giving and tax revenue reflects the evidence regarding how people respond to changes in tax rates.”

Seriously?! To someone who can afford to give $10,000 to charity, the person would short his favorite charity $1,000 so he can have an extra $20 in his pocket?  While giving the government $980 instead? This is a slap upside the head duh moment in the sensibility of economic theory. Having made this abundantly clear, I think Martin Feldstein eloquently has affirmed President Obama’s conclusion that this proposal should have little effect on charitable donations and a positive effect on tax revenues. Without this explanation, there might have been some foolish people out there who were actually opposed to the proposal.