Sandra York, CPA
Giving From IRAs Now An Annual Planning Opportunity
Since 2006, individual taxpayers have had the ability to make gifts to charity directly from their IRAs, traditional or Roth, through a temporary measure that first appeared in the Pension Protection Act. However, over the years, that provision expired and renewed several times. It could not be relied upon for planning purposes, until extender bills were passed. At the end of 2015, the Protecting Americans from Tax Hikes (PATH) Act made charitable giving from IRAs permanent. With permanency, a great planning opportunity exists.
The ability to gift from your IRA directly to a charity is available only to those individuals who have achieved age 70 ½ or older. It is important to note that the gift must be processed as a direct rollover from the IRA trustee to the charity. If you receive the distribution and then make a donation to charity, none of the following advantages will apply.
Exciting advantages await…
So what are the advantages? First of all, it counts toward your required minimum distribution (RMD). Say that you have enough income from other sources that you really don’t need your RMD that year, and you wish that taking it wouldn’t result in you owing more taxes. Instead, you can gift that amount (up to $100,000) out of your IRA to charity, and have that count as your RMD. (Note that any amounts taken in excess of your current year RMD will not count toward the next year’s RMD.)
Next, and perhaps more importantly, since the gift is made by rollover, it avoids inclusion in income and adjusted gross income (AGI). This is the exciting part!
First, it will not inflate your income, which would increase the likelihood of your Social Security becoming taxable. Second, it will not inflate your AGI, which is used to calculate the limitations on your medical expense itemized deduction and certain other miscellaneous itemized deductions. Other limitations that are triggered by a higher AGI are the phase-out of itemized deductions and the personal exemption. Again, since the gift is not included in AGI, the risk of inflating AGI and triggering these phase-outs is eliminated. Even if you no longer itemize deductions, this still provides an opportunity for charitable giving, without increasing your income that would be included in the calculation to determine if your Social Security is taxable.
There is an annual limit of $100,000, so it is important to note that this is not a one-time allowance, but an annual planning opportunity. Married couples who file jointly, and the spouse also has an IRA, could combine the annual limit and contribute up to $200,000.
The fine print: What qualifies and what doesn't?
We’ve covered above that it must be a direct transfer from the IRA trustee to the charitable organization, by a person at least 70 ½ years of age, and from a traditional or Roth IRA (401(k), SIMPLE IRAs and SEP plans do not qualify). In addition, the contribution must be made to an organization that qualifies as a charitable organization under Code Section 170(b)(1)(a). Donor advised funds, private foundations, trusts, and gift annuities are examples of some recipient organizations that do not qualify for this treatment. The effect on your state income tax could be different, depending upon where you live. Certain states, like New York, may already exclude a portion of retirement income from state taxation, so using this strategy may not yield as great a state tax savings as on the Federal side.
Careful not to double dip!
Don't fall into the trap of thinking you avoid including the charitable distribution in income AND you get to deduct it on your taxes. That would be double-dipping. Your benefit comes from not having to include it in income, and the intangible benefits from knowing you donated to a worthy cause.
Your unique situation cannot be addressed in an article of this nature. As always, we recommend you speak with your tax advisor when planning to use this strategy.