Give Your IRA Away Tax Free – and Other Year-End Tax Strategies


Reader Question:  For Opções Binárias em Portugal, I was able to give a portion of my yearly IRA distribution directly to an approved charity (my church) tax free.   I have been unable to determine if this type of distribution will be allowed for 2013 tax year. Please advise and thanks. D.D.
Answer: First of all, this is a great idea and thanks for reminding me so I can remind our readers. The American Taxpayer Relief Act of 2012 extended through calendar year 2013 the Qualified Charitable Distribution (QCD) provision which allows you to transfer money directly from your IRA to a qualified charity. A couple of reminders regarding the rules:
1.      You must be age 70 ½ or older in the calendar year the transfer is made.
2.      $100,000 is the maximum that can be transferred in a calendar year.
3.      You don’t get a tax deduction. Because the money is coming from an IRA account in which you’ve already received a tax deduction, you don’t receive a new deduction.
4.      Generally, you can use the QCD to satisfy your Required Minimum Distributions (RMDs) for this tax year. If you are planning to make charitable gifts equal to or in excess of your 2013 RMD, this ‘simplifies’ that transaction.
The advantage of the QCD is that you avoid taking the IRA funds directly with the implied income tax implications and get the funds directly to the charity. It also reduces the balance of your IRA account and therefore the future RMDs. A Donor Advised Fund is not treated as a qualified charity under this provision.
Here are a few other year-end strategies you should consider:
·        Use appreciated stock (long-term capital gains) for charitable gifts. For example, you bought one-hundred shares of Apple stock at $100 per share and it is now trading at $500 per share. Instead of writing a $1,000 to your favorite charity, give the charity two shares of Apple. The charity receives $1,000 worth of stock which it sells and pays no income tax and you avoid the capital gains tax on a future sale of those shares. My partner, Hugh Smith, CPA, CFA, pointed out that we often run into a client situation where they have owned the stock for so long that the cost basis is unknown. “This is the perfect stock to give to charity! You eliminate the need to spend hours researching the cost basis (which many times cannot be found). If you want to continue owning the stock, use cash to buy it back…therefore establishing a new (and higher) cost basis”, Hugh said.
·        Redirect a portion of your Alabama income taxes…for free! The Alabama Accountability Act, which was passed earlier this year, allows you to redirect the lesser of $7,500 or up to one-half of your State of Alabama income taxes to scholarships for low income children who are stuck in failing schools. These scholarships allow them to transfer to either non-failing public schools or to private schools. You receive a dollar-for-dollar State-of-Alabama income tax credit so this costs you nothing! So here’s the question: “Would you rather send 100% of your state income tax dollars to our legislators to do with as they please, or would you rather help a child from a low income family who desperately wants to get a better education but who is stuck in a failing school?”
“If you’ve already paid the bulk of your 2013 Alabama income taxes either through payroll deduction or quarterly estimated tax payments, you can still take full advantage of this strategy”, says Jenny McCain, president of Scholarship for Kids. You’ll simply follow the process, claim your tax credit on your 2013 tax return and receive a State of Alabama income tax refund. For a step-by-step guide, visit By using this guide you can complete the process in about 10 to 20 minutes. “Together, we can help substantially improve the education of our youth all across Alabama”, Jenny added.
·        Review your Medicare plan. Don’t forget to review your Medicare plans to ensure you have the most appropriate plan based on your situation.   The open enrollment period ends December 7th. Kimberly Reynolds, a partner here at The Welch Group and expert on Medicare plan selection, suggests that you visit, to review plan options available to you. “You can save a lot of money by matching a Prescription Part D plan to the actual medications you use,” Kimberly said.
·        Retirement plan contributions. If you have not maxed out your contributions to your company 401-k you can use the remaining paydays to increase your investment and income tax deduction at the same time. You’ll need to contact your human resources department for their assistance in adjusting your payroll deduction.