Philanthropy and Your IRA

September 06th, 2019


Making a direct transfer from an IRA to a charity, long a valuable planning strategy, has become even more valuable following the enactment of 2017’s Tax Cuts and Jobs Act.  That’s because the higher standard deduction coupled with the $10,000 cap on the deduction for state and local taxes effectively means that for many taxpayers there will no longer be a tax benefit for charitable giving.  They won’t have enough itemized deductions to get over the standard deduction threshold.  A direct transfer from an IRA to a charity provides a tax benefit in addition to the standard deduction.  What’s more, the transfer satisfies the required minimum distribution (RMD) rules that apply to those who are over age 70½.

Seven requirements

  1. Only those over age 70½ are permitted to use this strategy.  Watch for this tax trap in the year that a donor reaches the magic age.  All IRA distributions made during the year one turns 70½ count toward the RMD, but only those made after the half birthday may be rolled tax free to a charity.
  2. IRAs only.  Distributions from 401(k) plans, 403(b) plans, pension plans, or profit sharing plans are not eligible for charitable IRA rollover treatment.  For those plans, the donor must first roll the assets into a new IRA. 
  3. Direct transfers only.  The check from the IRA must be made out to the charity.  A check made out to the IRA owner that is endorsed over to the charity will not work. 
  4. Public charities and private operating foundations must be the recipient.  Ineligible recipients include private grant-making foundations (non-operating foundations), donor-advised funds, and supporting organizations.
  5. The payment would have qualified for a full charitable deduction.  In other words, no quid pro quo; the donor must receive nothing in return.  The qualified charitable distribution cannot be used to purchase a charitable gift annuity, for example, or even to pay for tickets to a fundraising dinner.
  6. Distributions are limited to $100,000 per year and must be otherwise fully taxable.  Nondeductible IRA contributions are not taxable when distributed, and thus they are not eligible for treatment as qualified charitable distributions.
  7. Documentation required.  The charity must supply a contemporaneous written acknowledgement of the gift and certify that the donor did not receive any financial benefit from making the gift.

Failure to meet any requirement results in the entire distribution being taxable to the donor.

Benefits

The biggest winners in using the charitable IRA rollover are those seniors who are using the standard deduction.  They would otherwise get no tax benefit from their charitable gifts.

Those who pay more tax as their adjusted gross income rises also are better off with this strategy.  This includes people subject to the 3.8% tax on net investment income, those whose income is high enough to cause their Social Security benefits to be taxed, and those who are paying higher Medicare part B premiums because of their high income.  Donors who live in states that do not allow a charitable income tax deduction generally will achieve a tax benefit from the direct transfer to charity, as their adjusted gross income for state tax purposes won’t be increased.  The 60% of AGI limit on the charitable deduction does not apply to the charitable IRA rollover.

Finally, the heirs will be winners as well. They will prefer to receive assets that receive a basis step-up to getting income in respect of a decedent, which will be fully taxable as ordinary income.

Additional wrinkles

  • Spouses.  Each spouse may roll up to $100,000 to charity if each meets the age requirement and if each has an IRA.  Rolling $160,000 from one spouse and $40,000 from the other would not work to secure the full $200,000 tax-free transfer.
  • Inherited IRAs.  Qualified charitable distributions may be made from inherited IRAs if the beneficiary meets the age requirement.
  • Pledges.  A qualified charitable distribution may be used to satisfy a pledge to a charity without triggering income to the donor, and without being a prohibited transaction that would otherwise cost the IRA its tax deferred status.

It is up to the taxpayer to report qualified charitable distributions.  The taxpayer reports all of the IRA distributions on line 15A of Form 1040, and reports only the taxable portion on Line 15B.

 

(July 2019)

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Legal, Investment and Tax Notice: This information is not intended to be and should not be treated as legal advice or tax advice. Readers should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal or tax advice from their own counsel.