Quickly stated. A law that expires on Dec. 31 allows an individual age 70½ or older to make direct charitable gifts from an individual retirement account (IRA), including required minimum distributions, of up to $100,000 to public charities (other than donor advised funds and supporting organizations) and not have to report the IRA distributions as taxable income on his or her federal income tax return. Most private foundations are ineligible donees, but private-operating and pass-through (conduit) foundations are. The tax-free rollover is for outright (direct) gifts only—not life-income gifts. There is no charitable deduction for the IRA distributions. However, not paying tax on otherwise taxable income is the equivalent of a charitable deduction.
Traditional and Roth IRAs only. Distributions from traditional and Roth IRAs are the only ones that are tax free. Distributions from employer-sponsored retirement plans, including SIMPLE IRAs and simplified employee pensions (SEPs) aren’t qualified charitable distributions; nor are distributions from Keoghs, 403(b) plans, 401(k) plans, profit sharing and other plans.
Doing a two step to qualify. First, roll over a non-qualified pension plan into a qualified IRA. That’s generally tax free. Make sure that’s so. Second, the qualified IRA then makes the distributions directly to the charity.
Pointer re donor-advised funds of community foundations. As noted, IRA distributions to those funds don’t qualify. But IRA distributions to a community foundation’s endowment and field-of-interest funds do qualify—as long as the donor has no advisory rights.
Distributions from a qualified IRA must be made directly by the IRA’s administrator or trustee to a qualified charity. A payment to the donor who one honko-second later gives it to the charity doesn’t qualify. (A honko-second is the shortest measure of time—the time that elapses between a traffic signal turning green and the driver of the car behind honking his horn.)
Required minimum distributions—big plus. The distributions are deemed to be qualified charitable distributions and thus aren’t taxable (up to $100,000).
The entire distribution must be paid to the charity with no quid pro quo.The exclusion applies only if a charitable deduction for the entire distribution would have been allowable (determined without regard to the generally applicable percentage limitations). Thus if the donor receives (or is entitled to receive), for example, a chicken dinner in connection with the transfer to the charity from the IRA, the exclusion isn’t available for any part of the IRA distribution. So don’t fowl up an IRA distribution with a quid pro crow.
Substantiation required. The exclusion won’t be available if the IRA distribution to the charity isn’t sufficiently substantiated. The charity must give the donor a timely written acknowledgment that it has received the IRA distribution and that no goods or services were given in connection with the IRA distribution.
You turn 70½ for purposes of qualifying for the IRA/charitable rollover when you are actually 70½ (not during the year in which you later are 70½).
Caveat on year-end charitable rollovers. A donor who by U.S. mail sends checks and securities to a charity this year that are received by the charity next year has made a charitable gift this year. Will a distribution mailed by the IRA trustee/custodian to the charity this year, but received by it next year, qualify for tax-free treatment? Unless clarified by the IRS, make sure that the charity actually receives the distribution this year.
Advantages of IRA/Charitable Rollovers:
*A gigantic additional pool of funds is available for charitable gifts;
*The approximately two-thirds of taxpayers who take the standard deduction—and thus can’t deduct their charitable gifts—can get the equivalent of a deduction by making gifts directly from their IRAs to qualified charities. Not being taxed on income is the equivalent of a deduction. So the RMD (required minimum distribution) is now a WMD (weapon of mass deduction);
*Itemizers who bump into the adjusted gross income (AGI) ceilings on charitable-gift deductibility can use distributions from IRAs to make additional taxwise gifts. And because they aren’t taxable on the distributions, they have the equivalent of additional charitable deductions;
*The carryover can be saved. Deductible gifts made in a current year are taken into account before deducting a carryover from earlier years. Making a gift from an IRA (as opposed to making a gift with other funds or assets) means that a carryover can be used in the current year;
*The IRA/charitable rollover (by not increasing adjusted gross income as would be the case if the taxpayer withdraws IRA funds instead of using the charitable rollover) can avoid or minimize the reduction of otherwise allowable deductions that are keyed to adjusted gross income—e.g., the 10 percent AGI floor on casualty loss deductions, the 7½ percent floor on medical expense deductions, and the 2 percent AGI floor on miscellaneous itemized deductions;
*Using the IRA/charitable rollover (instead of a withdrawal by the taxpayer that will be includable in income) can for some individuals reduce the amount of social security payments that are subject to tax; and
*If a donor’s state income tax law doesn’t allow charitable deductions: Making the gift from the donor’s IRA to the charity can be the equivalent of a state income tax charitable deduction. Caution. State laws differ so check out all the ramifications in your state. For example, in some states IRA distributions directly to the IRA owners aren’t subject to state income tax. A distribution from the IRA to charity thus won’t save state income taxes and the donor could lose a state income tax charitable deduction that might—depending on state law—be available for a gift from the donor to the charity. Of course, consider both the federal and state tax rules. You may have heard this before: Do the arithmetic under various scenarios.
Death-time transfers—reminder.The current and continuing laws allow tax-free distributions from IRAs to charities at death for both outright and charitable remainder gifts. Income in respect of a decedent (IRD) isn’t taxable to charities and charitable remainder trusts (CRT). When the beneficiary receives CRT payments, he or she will be taxable on those payments. For death-time transfers, there isn’t a ceiling or limitation on the types of charitable donees. Thus distributions to all private foundations and public charities (including supporting organizations and donor advised funds) qualify for the federal estate tax charitable deduction. To avoid IRD concerns, the gift must be properly structured.
Guidance from the IRS. In 2007, the IRS—fleshing out the Code and the explanation by the staff of the Joint Committee on Taxation —favorably filled in the blanks to some unanswered (and some already answered) questions:
• Check payable to charity but delivered to the charity by the IRA owner. The payment to the charity will be considered a direct payment by the IRA trustee to the charity and thus a qualified charitable distribution (QCD);
• For inherited IRAs. The exclusion from gross income for QCDs is available for distributions from an IRA maintained for the benefit of a beneficiary after the death of the IRA owner if the beneficiary has attained age 70½ before the distribution is made;
• Multiple IRAs. The income exclusion for qualified charitable distributions only applies to the extent that the aggregate amount of QCDs made during any taxable year for an IRA owner doesn’t exceed $100,000. Thus distributions from multiple IRAs are capped at a maximum total of $100,000;
• For married individuals filing jointly. The limit is $100,000 per individual IRA owner;
• QCDs don’t lay a glove on the AGI deductibility ceiling. Although charitable IRA distributions aren’t deductible Internal Revenue Code Section 170 charitable contributions, QCDs that are excluded from income under Section 408(d)(8) aren’t taken into account for purposes of the AGI ceilings for traditional charitable gifts;
• Substantiation requirements. Although not deductible, QCDs must still satisfy the deductibility requirements under IRC Section 170 (other than the AGI percentage limits of Section 170(b)) and the substantiation requirements under Section 170(f)(8));
• QCDs aren’t subject to withholding. An IRA owner who requests a charitable distribution is deemed to have elected out of withholding under IRC Section 3405(a)(2);
• IRA trustees and custodians are off the hook. In determining whether a distribution requested by an IRA donor satisfies the QCD requirements, the IRA trustee or custodian may rely upon reasonable representations made by the IRA owner;
• Required minimum distributions. A QCD is taken into account in determining whether the required minimum distribution (RMD) requirements have been satisfied;
• Treatment of a QCD manqué. If an intended QCD is paid to a charity but fails to satisfy IRC Section 408(d)(8)’s requirements, the amount paid is treated as (1) a distribution from the IRA to the IRA owner that is includable in gross income (under IRC Section 408 and 408A’s rules), and (2) a contribution from the IRA owner to the charity that is subject to IRC Section 170's deductibility rules (including the AGI percentage limits); and
• QCDs aren’t prohibited transactions—even if used to satisfy pledges. The Department of Labor, which has interpretive jurisdiction under IRC Section 4975(d), has advised the IRS that a distribution made by an IRA trustee directly to an IRC Section 170(b)(1)(A) organization (as permitted by IRC Section 408(d)(8)(B)(i)) will be treated as a receipt by the IRA owner under IRC Section 4975(d)(9), and thus isn’t a prohibited transaction and that’s so even if the IRA owner had an outstanding pledge to the receiving charity.
The way it was before 2006—and the road ahead. Amounts withdrawn from traditional IRAs and Roth IRAs and donated to charity were treated this way: (1) the usual rules relating to the tax treatment of withdrawals from IRAs applied to the amounts withdrawn; and (2) itemizers (but not non-itemizers) could claim income tax charitable deductions subject to the applicable adjusted gross income deductibility ceilings and carryover rules. Charitable gifts from IRAs were rare. The rules described above (enacted in 2006) had expiration dates and were extended a few times. The current expiration date for this favorable law is at the end of this year. And given the current climate in Congress, it is an unanswered question whether this law will once again be extended. So take Chico Marx into account when doing IRA/charitable planning. Let me explain:
Chico Marx once gave his check to writer Heywood Broun to pay off a gambling debt, but warned him not to cash it before noon. The following day Broun called Chico, complaining that the check bounced.
"What time did you go to the bank?"
"You said noon; I got there at twelve-o-two."
So if a charitable gift is to be made from an IRA, do it before it is "too late."
© Conrad Teitell 2011.