The Charitable IRA Rollover: Convenient, Tax Efficient and now Permanent

In late December, President Obama signed the Tax Increase Prevention Act of 2015, an extensive piece of legislation that included, once and for all, a provision making permanent an individual’s opportunity to make a charitable IRA rollover gift.

No longer does a prospective donor have to wait to see whether Congress will extend this provision for the current year and whether, if extended, that there will be sufficient time to complete the charitable IRA rollover gift process. Permanency of a tax law is an important component of financial, estate and charitable planning because individuals can rely upon it thus providing them a sense of certainty regarding their planning decisions. Now individuals can rely upon the charitable IRA rollover being available every year.

Briefly, the charitable IRA rollover allows certain taxpayers to make charitable contributions to public charities without income tax consequences and have that charitable contribution qualify toward meeting some or all of the donor’s annual required minimum distribution (RMD).

To best explain the finer points of a charitable IRA rollover, the remainder of this bulletin will follow a question and answer format.

1) What is an IRA charitable rollover?

An IRA charitable rollover is considered a “qualified charitable distribution.” A QCD as it is called has the following requirements:

  1. the IRA owner must have attained the age of 70 ½, (it is recommended that the donor wait a day or two beyond the day he/she turns 70 ½ before making the gift).
  2. the charitable gift must be made directly from the IRA administrator or trustee to a public charity (not a donor advised fund or supporting organization),
  3. gifts may be made from only traditional IRAs and certain Roth IRAs (generally those in existence for not more than five years),
  4. the aggregate gift may not exceed $100,000 annually regardless of whether multiple IRAs are used or multiple charities are the gift recipients, (a husband and wife may each gift up to $100,000 annually from their respective IRAs),
  5. the exclusion from income only applies if the distribution would otherwise have been treated as taxable income, and
  6. the full contribution to the charity would have been deductible. As such there can be no goods or services (any quid pro quo) provided to a donor or even made available. Any goods or services even of nominal value may taint the entire gift causing it to be included in income.

2) What are the donor’s income tax consequences of making a charitable IRA rollover gift?

If the QCD requirements are met, the gifted amount is excluded from the donor’s income. To validate that the distribution is excluded from income, the gift must be substantiated by the charity indicating that no goods or services were given in consideration of the gift. Likewise, there is no deduction since the gifted amount is not considered income.

3) Without the charitable IRA rollover, what are the income tax consequences to a donor in its absence?

In the absence of the charitable IRA rollover provision, a donor who decided to use IRA account funds to make a charitable gift to UWPV would have the following income tax consequences:

  1. donor makes a withdrawal from his/her IRA. The amount of the withdrawal must be included as income on the donor’s current year federal income tax return.
  2. donor deposits the withdrawal check into his/her checking account.
  3. donor writes a check to UWPV for the amount of the withdrawal.
  4. donor deducts the amount of the gift to UWPV as an itemized charitable deduction on Schedule A.

This series of steps zeroes out any current income tax liability attributed to this transaction and seems to suggest that a special charitable IRA rollover provision is unnecessary; however, it opens a Pandora’s box of seemingly endless undesired tax and related costs because the withdrawn amount must be recognized as income. This increases the donor’s adjusted gross income (AGI) and here lies the problem.

The adjusted gross income and a closely related term—modified adjusted gross income—are threshold amounts from which certain itemized deductions, personal exemptions, taxability of Social Security benefits, determination of Medicare premiums, eligibility for and phase-out of various tax credits and other vital calculations are made.

Please note that this withdrawal and deduction process described above remains intact and must be used for charitable gifts made from all other types of qualified retirement plans such as 401(k) or 403(b) plans unless those plans are converted to IRAs or Roth IRAs to take advantage of the charitable IRA rollover and must also be used for IRA gifts in excess of the $100,000 annual limit imposed by the charitable IRA rollover even assuming that the rollover procedure is used for the first $100,000. Unfortunately, an uninformed taxpayer/donor may still use the withdrawal and deduction process thinking that his/her income tax result will be the same as if the charitable IRA rollover procedure were used. This would be a potentially costly mistake.

4) I’m contemplating a charitable gift from my IRA. Can you provide specific examples where it would be to my advantage to use the charitable IRA rollover?

Unnecessarily increasing your adjusted gross income may increase your income tax liability through reduced or phased out deductions, personal exemptions and tax credits. A greater amount of your Social Security benefit may be subject to tax and your Medicare premiums for parts B and D may be higher.

  1. If a donor elects the standard deduction: By using the charitable IRA rollover, the donor eliminates the concern of taking an IRA withdrawal into income without the availability of an offsetting deduction as there is no income.
  2. If a donor lives in Massachusetts or Connecticut: The charitable IRA rollover eliminates the concern that neither Massachusetts nor Connecticut allows itemized charitable deductions on its individual income tax returns.
  3. If a donor has significant medical expenses: Those expenses are deductible on Schedule A to the extent they exceed 10% of adjusted gross income (if a taxpayer or spouse was age 65 or older in 2013 they are grandfathered under the 7.5% threshold until 2017). By using the charitable IRA rollover, a donor’s AGI will not be increased thus decreasing the likelihood that his/her medical expense deductions may be reduced or eliminated.
  4. If a donor has miscellaneous itemized deductions: Job hunting costs, union dues or tax preparation fees, and many other miscellaneous deductions are deductible to the extent they exceed 2% of AGI. Again, by using the charitable IRA rollover, the donor’s AGI will not be increased thus decreasing the likelihood that his/her miscellaneous deductions will be reduced or eliminated,
  5. If a donor gives more than 50% of his/her AGI to charity in a given calendar year: By using the charitable IRA rollover, the gift will not be included in determining the 50% of AGI deduction limitation perhaps enabling the donor to make additional charitable contributions.
  6. For high income taxpayers: The revived Pease limitation will reduce itemized deductions based upon the lesser of 3% of AGI over ($309,900 married filing jointly or $258,250 single for 2015) or 80% of otherwise allowable itemized deductions. Again, the higher the taxpayer’s AGI, the more tax liability will be incurred in this case through reducing itemized deductions.
  7. For high income taxpayers: Personal exemptions ($4000.00 in 2015) will be reduced by 2% for every $2500.00 or portion thereof that AGI exceeds a threshold for a given filing status. This phase-out begins at the same income levels cited at 6) above and are fully phased out at $380,750 single and $432,400 married filing jointly.
  8. The amount of Social Security benefits that are taxable is calculated using a formula based on AGI. The higher a taxpayer’s AGI, the more of his/her Social Security benefit may become taxable.
  9. Medicare premiums: Medicare premiums, specifically parts B and D, are determined based upon a formula using adjusted gross income. The higher one’s AGI the higher the premium assessed.
  10. Tax credits: Many tax credits (tax credits are a dollar for dollar reduction in tax liability and, as such, are more valuable than a deduction) are phased out as AGI increases

5) May a charitable IRA rollover gift be used to satisfy a donor’s existing pledge?

Yes, a charitable IRA rollover gift may be used to satisfy a donor’s existing pledge; however, it cannot be used to fund a charitable gift annuity or charitable remainder trust.

6) May a charitable IRA rollover gift be designated for a specific UWPV purpose such as Community Impact or Education?

Yes, a charitable IRA rollover gift may be designated for a specific UWPV purpose.

7) In addition to making a lifetime charitable IRA rollover gift to UWPV, may a donor also designate UWPV as the beneficiary of that IRA account?

Yes, designating a charitable organization as beneficiary of an IRA or other retirement plan is common because such an asset is viewed as undesirable from a tax perspective as it is subject to potential estate tax in a decedent’s estate and the remaining account value is income taxable to an individual beneficiary whereas, if paid to UWPV, the IRA’s value is removed from the decedent’s estate and being that UWPV is tax exempt, the remaining account value will be received income tax free.

Steps For Making a Charitable IRA Rollover Gift to UWPV

We have made this process as seamless as possible by providing you with two sample form letters downloadable from our website. Simply fill in the required information and either mail or fax them.

First: using the sample letter to Administrators/Trustees, fill in the required information in the blank spaces provided and mail or fax to your IRA Administrator or Trustee. Your IRA Administrator or Trustee may ask you to complete its own charitable IRA rollover authorization form before processing your request. If so, promptly complete and return it especially if year-end is approaching.

Second: using the sample letter to UWPV, fill in the required information and mail or fax to UWPV indicating your gift intention. Once received, we will be watching for your charitable IRA rollover gift so that we may promptly substantiate it in writing to you.

If you are contemplating additional IRA rollover gifts to UWPV in 2016 or plan to make gifts from multiple IRA accounts, simply use the two sample letters for each separate transaction.

Summary: In the absence of the charitable IRA rollover, many IRA owners did not use their IRA accounts for lifetime charitable giving simply because of the myriad of undesired tax pitfalls that could impose increased tax liability and additional costs. Now they can! The charitable IRA rollover provides a great opportunity for IRA funds to be used in charitable giving.

Questions should be directed to Steven Toth, JD, MS, CLU, ChFC at UWPV
Office: 413-693-0237

Disclaimer: United Way of Pioneer Valley does not provide legal, tax, accounting or other related professional advice. Such advice must be sought from the reader’s own advisors. The information provided here is for general informational purposes only.



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