Guest Column: Advance your legacy while reducing your taxes

by Phil Tobin, President Hudson Community Foundation Published:

In January, President Obama approved changes in the tax laws that, for some, could significantly increase their taxes. In reviewing your year-end tax plans, here are some charitable/tax planning strategies using Donor Advised Funds (DAF) that can help you reach your charitable dreams while reducing your taxes.

1) Increase in taxes:  The value of charitable deductions may be worth more now that the top marginal tax rate went from 35 percent to 39.6 percent and the top rate on capital gains and qualified dividends went form 15 percent to 20 percent. This may make the gifting of long-term appreciated assets, including marketable securities and non-cash assets, such as closely held shares and real estate, more attractive.  In addition, top taxpayers will pay a 3.8 percent Medicare tax on unearned income including capital gains, rents, dividends and interest income.

2) Alternative Minimum Tax:  You may be pleased to learn that charitable contributions are still one of the few eligible deductions on AMT.  If you are subject to AMT, charitable giving will reduce your tax bite.

3) IRA Charitable Rollover: The IRA Charitable Rollover, which was first enacted in 2006, is now extended through 2013.  The provision allows individuals, aged 70½ and older, to donate up to $100,000 from their Individual Retirement Accounts (IRAs) to public charities without having to count the distribution as taxable income. Although donor advised funds do not qualify there are other charitable funding options that do.

This strategy can benefit you if you a) are subject to annual RMD distributions, b) do not claim deductions, c) already exceed the 50 percent adjusted gross income (AGI) limits on charitable contributions, d) are paying taxes on social security income, and/or e) are a resident of Ohio.

If you want these IRA dollars to go into your Donor Advised Fund, you can take a distribution from the IRA in the traditional way and contribute those dollars to your DAF. The charitable deduction tends to reduce or offset the taxable income resulting from your IRA distribution.

4) Retirement Accounts: The Act expands the types of accounts eligible for a Roth conversion to include a traditional IRA, 401(k), 403(b), or 457(b) account. Increasing contributions to charity, including a Donor Advised Fund, is one way to offset the taxable income resulting from a Roth conversion.

Typical Donor Scenarios - A Donor Advised Fund can be a solution if you:

Are experiencing an extraordinarily high income year.

Will be selling a highly appreciated asset in the near future (closely held stock, real estate, etc.).

Want to support several charities through one substantial gift.

Want maximum flexibility to change the charitable beneficiaries over time. Want to involve a spouse, children and grandchildren in charitable giving.

Currently make cash gifts to numerous charities, but would benefit by giving appreciated assets instead.

Experience fluctuating income but want to maintain a steady level of charitable giving. are concerned about the complexity, cost, and lack of privacy of a private foundation.

Want to support a charity, but are not confident with the organization's investment management capability.

Want to keep your charitable giving confidential.

Wish to support a particular charity, but want to ensure that the gift is used as you intended.

We urge you to consult with your trusted advisers. Have a wonderful holiday.

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