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New Rules of Charity From Your IRA

An example is deductible medical expenses -- these are only deductible to the extent that they are in excess of 7.5% of your AGI. Miscellaneous Itemized expenses are subject to a similar "floor": they must be greater than 2% of your AGI to be deductible. In addition, certain phase-outs are affected by AGI level.

Another area that could be significantly affected is Social Security taxation. If your income is at a level where your Social Security benefit is taxed at less than the maximum 85% rate, including the IRA distribution in your income (under the 2012 method) would likely increase the taxation rate, possibly up to the maximum.

So you can see that increasing your income can have a significant impact on your overall tax return. Here's a quick example of how this could affect a taxpayer:

The taxpayer is single, 73, and subject to RMDs from his IRA. He wishes to make a charitable contribution of $50,000 from his IRA funds to his church. If this were 2011, he could make his distribution directly. Here's how his tax return worked out:
Income (pension and IRA, plus his $10,000 additional distribution): $50,000
Adjusted gross income: $50,000
Medical expenses: $10,000
Deductible medical expenses (above 7.5% of AGI): $6,250
Charitable contributions $10,000
Exemption: $3,700
Taxable income> $39,050
Tax: $5,888

Under the 2012 method, the taxpayer takes the distribution from an IRA and then sends it to a church. Here's how the tax return works out now:
Income (pension and IRA, plus his $10,000 additional distribution): $60,000
Adjusted gross income: $60,000
Medical expenses: $10,000
Deductible medical expenses (above 7.5% of AGI): $5,500
Charitable contributions $11,000
Exemption: $3,800
Taxable income> $39,700
Tax: $5,955

Under the new method, the tax cost was increased by $67. This doesn't seem like a lot, but if the circumstances were a bit different this could become sizable -- and who likes to pay extra taxes of any amount?

Bear in mind that this provision has expired and subsequently been extended in the past, so it's possible it could be extended again at some point in the future. Stay tuned.

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This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.
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