A message from the SonShine Charitable Fund President:
My friend Pat from Allaire Financial started telling me some interesting information about giving pretax monies. Below is information concerning these transactions and how it works.
For more information, please contact Pat. His Website is: https://www.allairefinancial.com/
If your goal is to support charity as part of your legacy while also leaving assets to family members, it may be more tax efficient to leave cash and appreciated assets to heirs, while making charities the beneficiaries of retirement assets upon your death. You can name the SonShine Charitable Fund or any other non-profit organization as the beneficiary of a life insurance policy just as you can name people beneficiaries. Because you can name more than one beneficiary, you can divide the death benefit among your loved ones and a charity. The percentage of the payout the SonShine Charitable Fund gets is up to you. If you have an existing policy, it’s easy to change the beneficiary to the SonShine Charitable Fund. You’ll likely need to provide the SonShine Charitable Fund Tax ID number which is 84-1866896. Also, let them know that they are a beneficiary so the SonShine Charitable Fund will know to contact the insurance company to collect the payout when you pass. Gift Dividends From a Life Insurance Policy You have another option if you want to get a charitable contribution tax deduction but don’t want to transfer ownership of your life insurance policy. If you have a permanent life insurance policy, you might be receiving dividends from the insurance company. You can have the current year dividend directed to the SonShine Charitable Fund. “If there is a pool of prior dividends built up in the contract, the owner can gift those as well to the SonShine Charitable Fund and get a tax deduction for that amount—up to tax income limits,” Voegele says. “In both cases, current dividend or pool of dividends, the base life contract stays in place. What is a Charitable Gift Annuity? The SonShine Charitable Fund and donors can both benefit from using a form of planned giving called a charitable gift annuity. Charitable gift annuities are similar to other annuities, except charities purchase these annuities on behalf of donors using the donor’s financial gift to the SonShine Charitable Fund. While the donor is living, they receive payments from the charitable gift annuity. Upon their death, the SonShine Charitable Fund would receive the remaining annuity balance. There are several advantages to charitable gift annuities over a traditional cash donation to the SonShine Charitable Fund for both the donor and the charity. Donors benefit from the purchase of a charitable gift annuity because they get an immediate tax deduction as well as future payments. The SonShine Charitable Fund benefits because when the annuitant dies, it receives the remaining amount of the annuity. Charitable gift annuities also allow organizations to build long-term relationships with donors. Clarity on IRA donations and some options to encourage. Options for donating retirement assets Donating during your lifetime: In order to donate retirement plan assets during your lifetime you would need to take a distribution from the retirement account, include the distribution in your income for that year, account for any taxes associated with the distribution, and then contribute cash to the charity—with one exception. People who are age 70 ½ or older can contribute up to $100,000 from their IRA directly to the SonShine Charitable Fund and avoid paying income taxes on the distribution. This is known as a qualified charitable distribution. It is limited to IRAs, and there are other exclusions and considerations as well. As part of an estate plan: By contrast, there can be significant tax advantages to donating retirement assets to the SonShine Charitable Fund as part of an estate plan. When done properly, charitable donations of retirement assets can minimize the amount of income taxes imposed on both your individual heirs and your estate. Donating an IRA to the SonShine Charitable Fund upon death When you name the SonShine Charitable Fund as a beneficiary to receive your IRA or other retirement assets upon your death, rather than donating retirement assets during your lifetime, the benefits multiply: • Neither you and your heirs nor your estate will pay income taxes on the distribution of the assets. • Your estate will need to include the value of the assets as part of the gross estate but will receive a tax deduction for the charitable contribution, which can be used to offset the estate taxes. • Because charities do not pay income tax, the full amount of your retirement account will directly benefit the charity of your choice. • It’s possible to divide your retirement assets between charities and heirs according to any percentages you choose. • You have the opportunity to support a cause you care about as part of your legacy. How to designate the SonShine Charitable Fund as the beneficiary of an IRA or 401(k) When you’re ready, making the SonShine Charitable Fund the beneficiary of your IRA or other retirement assets is typically straight forward: Fill out a designated beneficiary form through your employer or your plan administrator. Most banks and financial services firms also have beneficiary forms, or they can provide you with suggested language for naming beneficiaries to these accounts. Once the designated beneficiary forms are in place, the retirement assets will generally pass directly to your beneficiaries (including charities) without going through probate. If you are married, ask the plan administrator whether your spouse is required to consent. If required but not done, this could result in a disqualification of the charity as your beneficiary. Be clear about your wishes with your spouse, lawyer and any financial advisors, giving a copy of the completed beneficiary forms as necessary.
If you’re a higher-income Medicare beneficiary, you may be paying less in extra premium charges in 2023 than you were this year.
So-called income-related adjustment amounts, or IRMAAs, which are based on your tax return from two years earlier, kick in next year at $97,000 for single tax filers and $194,000 for joint filers, up from $91,000 and $182,000, respectively.
Additionally, with the standard Part B (outpatient care coverage) premium dropping by 3% next year to $164.90 from $170.10 in 2022, the IRMAAs also are less costly.
The surcharges apply to both Part B and Part D (prescription drug coverage) premiums and affect about 7% of Medicare’s 64.3 million beneficiaries. The higher your income, the higher the charge.
Whether you have to pay the surcharge is based on your modified adjusted gross income as defined by the Medicare program: your adjusted gross income plus tax-exempt interest income.
“You only have to go $1 over that [lowest] breakpoint and you’re subject to IRMAAs,” said certified financial planner Barbara O’Neill, owner and CEO of Money Talk, a financial education company.
“If you’re close to that or close to going to a higher tier, you’ve really got to be proactive,” O’Neill said.
In other words, there are some strategies and planning techniques that can help you avoid or minimize those IRMAAs.
Here are four to consider:
1. Focus on income streams under your control
While some income in retirement is generally set — i.e., Social Security and/or a pension — the key to avoiding IRMAAs is to focus on what income streams you can control, said CFP Judson Meinhart, senior financial advisor and manager of financial planning for Parsec Financial in Winston-Salem, North Carolina.
“The key to keeping [your income] below the IRMAA brackets is planning ahead to know where your income is coming from,” Meinhart said.
Be aware that the IRMAA determination is typically based on your tax return from two years earlier. If your income has dropped since then, you can appeal the IRMAA decision using Form SSA-44 and providing proof that you’ve experienced a “life-changing event” such as retirement, death of a spouse or divorce.
2. Consider Roth IRA conversions
One way to keep your taxable income down is to avoid having all of your nest egg in retirement accounts whose distributions are taxed as ordinary income, such as a traditional IRA or 401(k) plan. So whether you’ve signed up for Medicare yet or not, it may be worth converting taxable assets to a Roth IRA.
Roth contributions are taxed upfront, but qualified withdrawals are tax-free. This means that while you would pay taxes now on the amount converted, the Roth account would provide tax-free income down the road — as long as you are at least age 59½ and the account has been open for more than five years, or you meet an exclusion.
“You pay a little more now to avoid higher tax brackets or IRMAA brackets later on,” Meinhart said.
3. Keep an eye on capital gains
If you have assets that could generate a taxable profit when sold — i.e., investments in a brokerage account — it may be worth evaluating how well you can manage those capital gains.
While you may be able to time the sale of, say, an appreciated stock to control when and how you would be taxed, some mutual funds have a way of surprising investors at the end of the year with capital gains and dividends, both of which feed into the IRMAA calculation. “With mutual funds, you don’t have a whole lot of control because they have to pass the gains on to you,” said O’Neill, of Money Talk. “The problem is you don’t know how big those distributions are going to be until very late in the tax year.”
Depending on the specifics of your situation, it may be worth considering holding exchange-traded funds instead of mutual funds in your brokerage account due to their tax efficiency, experts say.
For investments whose sale you can time, it’s also important to remember the benefits of tax-loss harvesting as a way to minimize your taxable income.
That is, if you end up selling assets at a loss, you can use those losses to offset or reduce any gains you realized. Generally speaking, if the losses exceed the profit, you can use up to $3,000 per year against your regular income and carry forward the unused amount to future tax years.
4. Tap your philanthropic side
If you’re at least age 70½, a qualified charitable contribution, or QCD, is another way to keep your taxable income down. The contribution goes directly from your IRA to a qualified charity and is excluded from your income.
“It’s one of the few ways you can really get money out of an IRA completely tax-free,” Meinhart said. “And when you’re 72, that charitable distribution can help offset your required minimum distributions.”
The maximum you can transfer is $100,000 annually; if you’re married, each spouse can transfer $100,000.