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    Make a Charitable Gift Using Your IRA Rollover...and Save Big

    Charitable contributions have always yielded tax savings, but a newly permanent charitable giving tax break, the IRA charitable rollover, which was included in the PATH Act, now helps donors of all sizes.  Whether you give $100 or $100,000 to charity, you can save a significant amount of tax money, provided you contribute in the right way.  

    The IRA charitable rollover, or qualified charitable distribution (QCD), lets you, once you reach 70½, transfer up to $100,000 a year from your Individual Retirement Account directly to one or more qualifying charities.  The transferred assets will not be recognized as income for federal income tax purposes, and will count toward your annual required minimum distribution.

    This is a major shift from previous law, where withdrawals from traditional IRAs were taxed as income, even if they were immediately directed to a charity. The donor received a tax deduction for his or her donation, but various other federal (and sometimes state) tax rules prevented the deduction from fully offsetting his taxable income. As a result, many donors chose not to use IRA assets for lifetime gifts. The charitable IRA rollover changes all of that.  Now, a person who satisfies an annual church pledge, for example, out of his or her IRA will see a lower Adjusted Gross Income (AGI), which may save him on Medicare premiums, the 3.8% net investment income tax, and other income-sensitive items or may reduce the amount of Social Security benefits which are taxable.

    So, what qualifies?  In general, your charitable distribution must satisfy the following six tests.

    1. The distribution must be made from a traditional or Roth IRA.

    If you don’t have one, you might consider transferring funds from other accounts into an IRA and then making the qualified charitable distribution from that IRA.  Discuss this with your accountant first.

    2. The distribution must be to a public charity.

    Public charities are described in Code Section 170(b)(1)(A). Distributions to other types of organizations won’t qualify, even if they are affiliated with public charities.

    3. You must be, at a minimum, 70½ years old.

    4. The distribution must go directly to the charity.

    You cannot take the money first and then give it to the charity.

    5. The distribution must be deductible as a charitable contribution.

    If the entire distribution wouldn’t meet charitable deduction rules, it may not qualify for exclusion as a qualified charitable distribution.

    6. The distribution must be otherwise includable in gross income. If part of a distribution wouldn’t be taxable if it was received by the taxpayer, then that portion won’t be excluded from the taxpayer’s income if it is transferred to a charity. Only the taxable portion of a charitable distribution qualifies for exclusion.

    Keep in mind that the amount that can be excluded from income is limited to any amount up to $100,000 per taxpayer per year. So, if you are married, you can together donate up to $200,000 in each tax year, provided that you each own at least one IRA and have reached age 70½.  You may also have to pay state or local taxes on your IRA Rollover.  States and municipalities differ on whether you need to include the charitable rollover in your taxable income.

    Talking about deductions in July might seem odd, but year-long tax planning is a habit you must develop.  This rollover is a clear tax win, particularly if you don’t normally itemize deductions. Even if you do itemize, it can save you more tax than taking the IRA distribution into income and then donating it. So talk to your accountant about this charitable tax “trick”.  And if you make a distribution from your IRA to charity, speak up -- and loudly!  There’s no way to know you made a contribution this way just by looking at the IRS Form 1099-R that lists distributions from your IRA. It’s easily missed, so communicate it clearly.

     

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