Charitable Planning

It’s Back! The Tax-Free IRA Charitable Rollover

December 15, 2021 By Doug Welty

Thanks to the Protecting Americans From Tax Hikes Act of 2015 (“PATH”), signed into law on December 18, 2015, Section 408(d)(8) of the Internal Revenue Code once again provides a $100,000 annual exclusion from gross income each year for qualified charitable distributions (QCDs) made directly from a traditional IRA by donors aged 72 or older.

Donate Here Furthermore, this IRA “charitable rollover” provision was made permanent (meaning it would take a vote of both Houses plus a presidential signature to change it), retroactive to January 1, 2015. This makes it much easier to plan for charitable rollover donations and make them without the year-end uncertainty that has plagued senior donors for the past several years.

IRAs Only

As in past years, distributions from 401Ks, 403Bs, the TSPs of federal employees and military retirees, and other employer-sponsored retirement plans (such as SIMPLE IRAs and SEP plans) are not eligible. However, you usually can roll assets from those plans into IRAs and then donate them if you begin the process early enough in the year.

To qualify, the funds must be transferred directly by your IRA trustee to an eligible charity. Not all charities are eligible. For example, donor-advised funds (such as those offered by Fidelity Charitable and Vanguard Charitable) and supporting organizations are not eligible recipients.

And, as in the past, distributed amounts don’t qualify for deductions (since they were never taxed in the first place). Instead, they may be excluded from your income — giving you a smaller Adjusted Gross Income on your Form 1040.

Under a special and favorable IRS rule under the charitable rollover provisions, distributions from an IRA to charity are deemed to come first from the taxable portion of the IRA account, and then from any non-taxable portion. This is a distinct benefit to taxpayers who made non-deductible IRA contributions during their working years.

You May Not Receive Anything Of Value In Return

This rule can be harsh, so be careful. Any quid pro quo benefit or thing of value received by the donor in return for the charitable rollover distribution – even the value of a dinner, a sports ticket, or other seemingly trivial benefit, may disqualify the entire distribution, not just a portion equal to the benefit received, from QCD treatment.

Therefore, a careful donor will first advise the charity well in advance that: (1) a distribution will be made from an IRA account to the charity and that it is intended to constitute a qualified charitable distribution under IRC § 408(d); and (2) that no goods, services, or benefits of any kind are to be provided by the charity to the donor or any other person in consideration for the distribution. (Charities usually know this well, but it never hurts to remind them.) In addition, a wise donor will request in advance that the charity provide a letter to the donor acknowledging the amount of the distribution that it received and confirming that no goods, services, or benefits of any kind were or will be provided to the donor or any other party in exchange for the distribution. If you don’t receive such a letter within days of making a QCD, you should remind the charity that you need one.

[Updated: December 16, 2021]

Congress Procrastinates Again on Tax-Free Charitable IRA Rollovers

December 20, 2013 By Doug Welty

Once again, a special provision of the Tax Code offering older owners of individual retirement arrangements (IRAs) an advantageous way to make charitable donations, is scheduled to expire on December 31. For the remainder of 2013, a traditional IRA owner, age 70½ or over, may transfer directly, tax-free, up to $100,000 per year to an eligible charity, regardless of whether he or she itemizes income-tax deductions.

IRAs Only

Donation can and heart Distributions from 401Ks, the TSPs of federal employees and military retirees, and other employer-sponsored retirement plans (such as SIMPLE IRAs and SEP plans) are not eligible. However, if you hurry, you may be able to roll assets from those plans into IRAs and donate them before the giving deadline expires.

To qualify, the funds must be transferred directly by your IRA trustee to an eligible charity. Not all charities are eligible. For example, donor-advised funds and “supporting organizations” are not eligible recipients.

The distributed amounts don’t qualify for deductions (since they were never taxed in the first place). Instead, they may be excluded from your income — giving you a smaller Adjusted Gross Income on your Form 1040.

Charitable Rollovers Are MRDs

Amounts transferred to a charity from an IRA are counted in determining whether you have met the IRA’s required minimum distribution (MRD) requirement. And if you have made both deductible and nondeductible contributions to your traditional IRAs, a special rule treats amounts distributed to charities as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds, as would be the case with regular distributions made to you.

Tax-Free IRA Charitable Rollovers Reinstated by American Taxpayer Relief Act (“ATRA”)

January 3, 2013 By Doug Welty

Donation can and heart From 2006 through 2011, individuals age 70-1/2 or older were eligible to make donations of up to $100,000 directly from their individual retirement accounts (IRAs) to benefit public charities.

Although they received no charitable deduction for such transfers, they didn’t have to report the distribution as taxable income, either. Result: zero tax. And, such a distribution counted toward fulfilling their required minimum distributions (MRDs) for those years.

But Congress didn’t act during 2011 to extend them, so they disappeared during 2012. However, Congress, in its wisdom (and perhaps because nonprofit institutions deluged Congress with lobbyists) reinstated IRA charitable rollovers in the American Taxpayer Relief Act of 2012 (signed into law on January 2, 2013), both for tax year 2013 and retroactively for tax year 2012. And since most taxpayers eligible to make IRA charitable rollovers didn’t make them in 2012 (since there was no guarantee they would get zero-tax treatment), Congress extended the period to make 2012 contributions through January 31, 2013.

If you decide to make an IRA charitable rollover during January, be sure to discuss with your tax advisor whether you should characterize it as a 2012 rollover or a 2013 rollover.