A special report from Marguerite L. Mount CPA (NJ,NY)
Managing Director, The Mercadien Group


Please note: As of early 2014, we do not yet know whether individuals will be able to make qualified charitable distributions from their IRAs this year.  This page will be updated if legislative action again permits these charitable gifts.

Taxes have increased in 2013

At the end of 2012, along with the countdown to midnight, American taxpayers wondered how the new tax law, The American Taxpayer Relief Act of 2012, would impact them. The answer to that question is, “it depends.”

  • Married taxpayers with combined taxable income in excess of $450,000 ($400,000 for single taxpayers) are facing up to a 4.6% Federal tax increase on ordinary income and a 5% increase on capital gain income in 2013.
  • Married taxpayers with adjusted gross income in excess of $300,000 ($250,000 for single taxpayers) are facing a phase-out of their itemized (including charitable) deductions and personal and dependency exemptions in this year.

Independent of the American Tax Relief Act of 2012, a 3.8% Unearned Income Medicare Contribution Tax became effective for tax years beginning after December 31, 2012. This tax is levied on an individual’s net investment income if their modified adjusted gross income is over $200,000 (or in the case of married taxpayers filing jointly, over $250,000).

Great opportunity for 2013

The combination of increased tax rates and diminished deductions could mean a much bigger tax bill than in prior years. However, included in the end-of-year Tax Act was a provision that allows you to redirect your IRA contributions to a charitable organization in 2013 – which could be a more attractive tax savings tool than ever before.

If you are 70½ or older, and therefore required to withdraw monies from your IRA every year, and if you don’t necessarily need that income and you know a charity that you would like to support, then utilizing the “Qualified Charitable Distribution” feature that is available in 2013 might be of interest to you.

For 2013 you can direct up to $100,000 of your required IRA distribution to a qualified 501(c)(3) organization. The money must go directly from your IRA to the charity – you can never have control over the distribution. You cannot contribute to a donor advised fund since you would have discretion over the monies, but you can contribute to other kinds of funds held at a community foundation.

This option may pack more tax savings punch than you realize. The redirected IRA distribution is not included in your Adjusted Gross Income (AGI). This may allow you to substantially reduce your income, which could keep you below the thresholds for higher regular income taxes and the Medicare Contribution Tax. Depending on your AGI, it can also lessen or even eliminate the impact of a phase-out of your itemized deductions and personal and dependency exemptions.

How it works

Even though you cannot take the IRA distribution as a charitable deduction (because you did not recognize it as income), you are actually receiving the full benefit of the deduction when you distribute directly from your IRA account to the charity. How? If you had taken the IRA deduction as income at, for example, $100,000, and then written a check to the charity for $100,000 – assuming your income is over $300,000 and your charitable deduction will therefore be reduced by 3% – your realized deduction would be only $97,000. And you wouldn’t have reduced your adjusted gross income by $100,000, with the additional tax benefits that can bring.

As you consider your tax planning options for 2013, remember that the Qualified Charitable Distribution is a powerful planning tool worth your consideration.


Marguerite L Mount, CPA, Managing Director, is the leader of the Individual Services Team at The Mercadien Group, a full service financial and accounting firm serving Central New Jersey for over 50 years. For more information you can contact Marguerite at mmount@mercadien.com or visit www.mercadien.com.