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Make the gift of a lifetime
IRA Charitable Rollover is now permanent
There is good news for community foundation donors in their 70s. A recently made permanent law makes it possible to give individual retirement account (IRA) assets to charity, free from federal tax, annually. Prior to 2006, all lifetime distributions from IRAs were taxed—even those given to charity.
As such, our donors can give far more with less! This may be an attractive giving option for you if you are:
• Over 70½ and now receiving minimum IRA distributions — but do not need the extra income
• Interested in making a significant lifetime gift to impact your community
The Pension Protection Act of 2006 permitted individuals to roll over up to $100,000 from an IRA directly to a qualifying charity without being taxed. On Dec. 18, 2015, Congress passed the PATH Act, making permanent this unique charitable giving opportunity. Single and married individuals 70½ and older are eligible to give in this way from their IRAs.
Gifts can be made using IRA assets to the following fund types: unrestricted, field of interest, designated and scholarship. Gifts to donor advised funds are prohibited.
For more information on the Charitable IRA opportunity, read the Frequently Asked Questions below or give us a call at (989) 755-0545.
Frequently asked Questions
Why do donors want to give IRA assets to their community foundation?
After decades of deliberate saving, some of today’s retirees have more money in their IRAs than they need for daily living expenses and long-term care. For larger estates, a good portion of IRA wealth goes to estate taxes and income taxes of non-spousal beneficiaries; heirs may receive less than 50 percent of IRA assets passed on to them through estates.
Instead, IRA holders may choose to leave their IRAs to qualified charitable organizations — choosing charity over taxes.
Which donors stand to benefit most from giving their IRAs to charity?
Because charitable IRA transfers are not included in taxable income and not available for itemized charitable deductions, these special rules may benefit many different types of individuals:
• Generous donors: When making a major gift, some taxpayers may give more to charity than they can deduct that year. Donors cannot deduct more than 50 percent of their income for gifts of cash to public charities (30 percent, if giving to private foundations). Although amounts over 50 percent can be carried forward and deducted in future years, taxpayers will face an immediate tax bill and may lose some of the benefits of the deduction if they die before the gift has been fully deducted. Donors who consistently give above the limit will not be able to take advantage of the carry forward provisions.
• Non-itemizers: Donors who regularly give a portion of their income to charity are not able to enjoy a tax break from the contribution because the standard deduction is still greater than the total of all itemized deductions. This may be especially true if state and local income taxes are low.
• Financially comfortable: Individuals or couples who distribute the minimum from their IRA — and have other forms of income to pay living expenses — may find that transferring their minimum distributions to the community foundation helps fulfill personal charitable goals, tax-free.
In the past, how did the tax law treat charitable gifts made from IRAs?
Prior to 2006, IRA holders faced a disincentive for giving retirement assets to charity during their lifetimes because all withdrawals from traditional IRAs were subject to income tax. Thanks to the renewed tax provision, retirees will be able to give far more support without being penalized, doing so during their lifetimes and seeing their gifts benefit their communities.
In the past, when a donor of any age withdrew IRA funds to make a charitable gift, he or she was liable to pay income tax on the withdrawal, offset to varying degrees by a charitable deduction for the gift.
As a consequence of this unfavorable tax treatment, very few individuals donated IRA funds to charity during their lifetimes.
How has the tax law changed?
The current law permits individuals to transfer up to $100,000 from individual retirement accounts directly to a qualifying charity without recognizing the assets transferred as income for federal tax purposes. A donor who has reached age 70½ is now allowed to exclude from his or her income tax calculations certain IRA withdrawals. In most circumstances, these charitable contributions are not tax deductible unless the retirement accounts were funded with after-tax dollars.
This provision is permanent.
What are the advantages of this renewed law?
The tax benefits now available to American seniors will encourage new contributions from individuals who will no longer have to pay tax on a charitable gift of IRA funds. When given through a community foundation, these contributions can support all aspects of community well-being: arts and culture, economic development, education, environment, health and human services, neighborhood revitalization and more.
Now it is easier than ever for more people to enjoy the experience of making the tax-free gift of a lifetime using their excess retirement assets.
What if a donor contributes more than $100,000 from an IRA?
Because the amount that the donor is able to exclude from income is limited to $100,000 under the act, the remaining amount would be recognized as income. Within a married couple, each person can transfer $100,000 from his or her account.
Donors may choose to contribute additional amounts to charity; however, the extent to which additional amounts can be deducted from their income will be determined following general rules of itemized deductions where the charitable percentage limitations and itemized deduction reduction are factors.
What is the itemized deduction reduction?
Higher income taxpayers must reduce their itemized deductions by the lesser of 3 percent of the amount by which their income exceeds a certain amount – $250,000 for individuals, $275,000 for heads of households and $300,000 for married couples filing jointly.
These taxpayers can lose up to 80 percent of the value of their deductions because most itemized deductions have to be reduced by 3 percent of the amount by which the taxpayer’s income exceeds a certain number, or 80 percent of the taxpayer’s itemized deductions.
Example: A married couple filing jointly has $500,000 in adjusted gross income (AGI) and because their AGI exceeds the $305,050 threshold, the 3 percent reduction applies to this couple’s itemized deductions.
AGI $500,000
Excess of couple’s AGI over $305,500 = $194,950
3% reduction x 3%
Reduction of itemized deductions $5,848.50
The couple’s itemized deductions will be reduced by the lesser of $5,848 or 80% of the itemized deductions.
For larger estates, IRA accounts passed on to heirs (non-spousal beneficiaries) may lose a substantial portion of their value to estate and income taxes. Therefore, people may be encouraged to liquidate these accounts during their lifetimes or designate a charitable beneficiary upon death. The law gives people a way to make a difference during their lifetimes by transferring IRA funds to a charity without triggering taxes on the withdrawal.
Example: An individual has accumulated approximately $1,000,000 in retirement assets; she has other sources of wealth for most living expenses. This individual planned to leave a portion of her estate to charity. She can now choose to transfer up to $100,000 of IRA assets to charity annually. Unlike other lifetime withdrawals, this transfer is not subject to tax. The donor can establish a special named fund at the community foundation (other than a donor advised fund), and the gift can start addressing causes important to her.
Does a donor also receive a charitable deduction when he or she transfers assets to a charity under this provision?
No. The benefit under this provision is that the individual does not realize the amount contributed directly from the IRA to a qualifying charity. Because a donor does not include the amount in his or her gross income, the individual may not take a charitable contribution deduction for the contribution. To do so would allow a donor to receive a double benefit from the contribution. For this reason, charitable contribution deductions are explicitly prohibited.
How will charitable distributions affect the minimum required distributions from a taxpayer’s IRA?
Shortly after an individual reaches age 70½, he or she is generally required to receive distributions from his or her traditional IRA. Distributions from an IRA to a charity will receive the same treatment as distributions to the individual taxpayer for the purposes of minimum required distributions.
Are there any IRA transfers to the community foundation that do not qualify for preferred tax treatment?
Yes. Transfers to Supporting Organizations and Donor Advised Funds do not qualify. In addition, split interest gifts, such as Charitable Annuities, Charitable Lead Trusts and Charitable Remainder Trusts, do not qualify. Further, an individual may not receive a benefit in return for an IRA distribution.
Because such transfers do not count as qualified distributions under these special rules, the donor will have to first recognize those distributions as income. The donor’s charitable deduction must then be calculated as a regular itemized deduction.
How can an IRA gift be made?
IRAs are typically held by a financial service or trust company. These custodians will likely provide a form that could be used to transfer the IRA directly to charity, with no tax incurred.
DISCLAIMER
The information provided here is based on analysis of recent legislation. Every effort has been made to ensure accuracy of the answers to these questions. However, due to the complexity of the tax law and the fact that many of these provisions introduce issues that are new to the Internal Revenue Code, this information may be subject to change. It is not a substitute for expert legal, tax or other professional counsel and we strongly encourage donors to work with their professional advisors to determine the impact of this legislation on their particular situations. This information may not be relied upon for the purposes of avoiding any penalties that may be imposed under the Internal Revenue Code.
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Example
Mr. Smith, age 75, has accumulated approximately $2,000,000 in his IRA accounts. He has other sources of wealth and has plans to leave a sizable estate to his heirs and charity.
Under this law, Mr. Smith can create a fund at the community foundation to address the causes he cares about most by transferring IRA funds tax-free. Mr. Smith can transfer up to $100,000 in 2016. In addition, if Mr. Smith is married, his wife can also make similar gifts from her IRA accounts, impacting the community in ways personal, unique and enduring.
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