New Law Gives Boost to IRA Charitable Rollovers

April 1, 2016

senior charityCongress just made donating to charity easier. Late last year, President Obama signed Protecting Americans from Tax Hikes into law. Included in that act was the permanent extension for certain IRA owners to donate to charitable organizations from their retirement accounts. Usually, such donations generate ordinary income for taxpayers, but under this rule, the rollover is excluded from gross income. The benefit of making the law permanent? Charitably inclined individuals can now regularly include the rollovers in their tax planning.

Here are some points of the rule that you should know:

  • IRA owners can donate up to $100,000. Retirees age 70 ½ and older may give up to $100,000 directly from their IRA to qualified charities. The key word is directly. The distribution cannot be made to you first. Rather, it must be transferred by your IRA custodian to the charity.
  • Rollover gifts can satisfy your required minimum distribution (RMD). Your annual RMD can be fulfilled through this rollover to charity. You can choose to make one transfer or multiple transfers, and you can select a single or multiple charities. Normally, RMDs are considered ordinary income for tax purposes, but the rollover gift is not subject to income tax the year of the rollover. Nor is it included in your adjusted gross income, potentially making this an ideal tax planning strategy for people who do not itemize deductions.
  • Donations must be made to qualified charities. Rollover distributions must be made to a public charity. Private foundations, charitable gift annuities, donor-advised funds and charitable remainder trusts are not eligible. If you are in doubt about whether your favorite charity is eligible, check with your financial advisor. The gift cannot be a quid pro quo donation, meaning you must not receive anything in return for the contribution. The charity must provide you with an acknowledgement of your donation, specifying the amount it received and that it did not compensate you for the gift.
  • The rollover can help reduce adjusted gross income (AGI). The rollover is not eligible for an itemized charitable tax deduction, but it is excluded from AGI. Consider the fact that a reduced AGI can benefit you in many tax calculations, including Medicare Part B premiums and Social Security income taxability, and the attractiveness of this strategy becomes even more apparent.

Leaving a legacy and receiving a tax benefit do not often go hand in hand. The charitable IRA rollover can help you achieve both goals by allowing you to direct your RMD to the organizations you support while reducing your tax liability. However, the strategy is not for everyone. Consult with your financial advisor to determine whether the IRA rollover is the best way for you to make an impact through giving while minimizing your tax burden. 

Please note: You should consult your tax advisor before taking any action on topics discussed in the blog.