The RESOURCE Recap

Bryan RushAuthor:
Bryan Rush
Washington Partner Group

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Right before the holiday, Congress finally agreed on a deal to fund the U.S. Government. This deal also included extending the 50 plus tax provisions that had expired earlier this year. Protecting Americans from Tax Hikes Act of 2015 (PATH) was finally brought to a vote in the U.S. House of Representatives and passed by a margin of 316-113 and subsequently passed by the U.S. Senate by a margin of 65-33. It was also signed into effect, along with the president’s signature. We had patiently watched all year long for these tax extenders, specifically due to the popular bonus and Section 179 depreciation limits included in the PATH act. However, this particular extender bill was different from its predecessors, in that many of the popular tax benefits were made permanent parts of the tax code rather than just extended for another two years. This is another step forward for Congress towards overall tax reform.

One of the provisions that was made permanent was the opportunity to make distributions from Individual Retirement Accounts tax free, as long as the funds were provided to qualified charitable organizations. For those taxpayers who may not need to rely on distributions from IRA accounts to live on, this can be a good way to get dollars out of their IRA accounts and avoid paying income tax on them. I recently had a meeting with a 70-year-old client that had done very well with real estate investments and would not need to use IRA dollars to fund her lifestyle needs. This client also did not have suitable beneficiaries to leave these dollars to. It was her intent to give much of her estate to charity. Due to the required minimum distributions rule (RMD), she would be forced to take distributions from her plan or incur a penalty. Distributions in excess of the calculated RMD are deemed to satisfy the RMD requirement even if a charity is the recipient. Due to this provision, she could begin her charitable giving strategy now and avoid income tax on the distributions amounts.

Last year, we also worked with a client to make a charitable contribution from their IRA account. The couple had done very well but were not going to get much from making charitable contributions due to the itemized deduction phase out rules. Also in this particular year, they did not need the RMD distributions. Instead of collecting the RMD distribution they contributed those dollars to their favorite charities and avoided paying income tax on the IRA distribution.

Now before you call your financial advisor to start making charitable contributions to your favorite charities from your IRA account, be advised that this tax benefit is only available to eligible taxpayers. Most notably, the taxpayer must have reached the age of 70 ½ before they can start making tax free distributions from IRA accounts. If you have reached at least this first hurdle, then please call your tax advisor to discuss how this strategy would work for you. However, if you have not reached this minimum age requirement (the fact that this provision has now been made permanent), you might want to discuss it with your tax and financial advisors as part of your overall estate plan. In the meantime, if you are not eligible to make charitable contributions tax free using your IRA account, but want to make deductible contributions, you might consider using a Donor Advised Fund. Especially if you would have substantially appreciated stock that can be used to fund the contribution, but want the flexibility of which charities will receive your contribution. But more on that later.