In recent client meetings, there has been a lot of discussion about what we recommend to ensure our client’s portfolios can weather any potential market volatility or likely tax increases on the horizon. Many people have accelerated income in 2012 by exercising stock options or converting Roth IRA dollars creating a larger tax liability than usual. As always, we do not advocate any investment changes based on forecasting, but there are a few things that can be done to mitigate your tax bite this year.
This is often the time of year when people start to think about charitable giving. With a tax hike looming, it is more important than ever to be strategic when supporting your favorite causes.
A great way to accelerate your charitable deductions is to open a donor-advised fund. The Greater Cincinnati Foundation, Schwab Charitable and Fidelity Charitable all have donor-advised funds. You can contribute appreciated assets, real estate, closely held stock or cash today, take a tax deduction for the full market value of your gift this year, and then make grants to the charities you want to support over time.
Another consideration if you are over 70½ is making a charitable gift directly from your IRA account. This is called a Qualified Charitable Distribution (QCD). QCD’s have only been available for a few years and it is still uncertain whether they will be extended in 2012. Last year Congress waited until December and then decided to allow Qualified Charitable Distributions for 2011.
If you are over 70½, do not typically spend the money you must take from your IRA each year under Required Minimum Distribution rules, and make charitable gifts, you have nothing to lose by making a contribution directly from your IRA this year. If the law is extended for 2012, you will have made a tax free donation, and if the law is not extended you only pay the same amount of tax you would be liable for if the contribution were never made.
Income taxes are an obligation, not a choice, and the uncertainty about their future only creates frustration. By creating a plan with your charitable giving you can gain some control over your tax liability.