IRA Charitable Rollover

There is good news for Community Foundation donors in their 70s – and for the communities and causes they care about. Earlier today the President signed legislation renewing and making permanent a law making it possible to give individual retirement account (IRA) assets to charity, free from federal tax, annually. Prior to this new law taking effect, all lifetime distributions from IRAs were subject to taxation – even those given to charity.

As such, our donors can now 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.

Using IRA assets to make a gift during your lifetime, as opposed to giving via bequest in your will, enables you to experience the joy of making a major gift.

“We’re ready to help our donors take advantage of this legislation and make gifts during their lifetimes. Our personalized service and local expertise helps donors address the issues and causes most important to them,” said Bret Bicoy, President & CEO of the Door County Community Foundation.

How it works

  • You make a gift of up to $100,000 by transferring IRA assets to the Door County Community Foundation. You must be 70 1/2 years old. If married, each spouse can transfer up to$100,000 from his or her IRA annually.
  • Your gift can be placed into a charitable fund in your name, the name of your family, or in honor of any person or organization you choose. We handle all administrative details. Please note that private foundations and donor advised funds do not qualify.

By giving through the Door County Community Foundation, you can use your gift to meet ever-changing community needs – including future needs that often cannot be anticipated at the time your gift is made. Your gift can target the causes and programs you care about most.

Where you can give

  • Discretionary Funds. These offer the best of both worlds – the opportunity to choose a broad area that interests them while relying on the Community Foundation to identify the organizations that will make the greatest impact on that issue.  Discretionary Funds include the Arts Fund, the Children & Youth Fund, the Education Fund, the Green Fund, the Health & Human Needs Fund, the Healthy Water Fund, the Historic Preservation Fund, and the Women’s Fund.
  • Non-Profit Endowment Funds. The Community Foundation administers the vast majority of endowment funds for the charities of Door County.  Visit www.GiveDoorCounty.org for a listing of the countless local non-profits with endowments at the Community Foundation.
  • Scholarship Funds. You can create a scholarship in your family’s name to provide educational opportunities for our young people.

Contact us at the Community Foundation to learn more or download an information sheet.

Here is an analysis of the new law prepared by the Council on Foundations in Washington, DC:

Why do donors want to give IRA assets to the Door County 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 donorsWhen 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 benefit 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 new 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 new 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 the 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.

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 Door County 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.

The information provided here was prepared by the Council on Foundation and 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.

One thought on “IRA Charitable Rollover

  1. As an advisor, when I was in private practice several clients used this technique for their own tax advantage. Effectively since tax is reduced the effect is more – both the donor gives more and there is more for charities when the tax is completely zero. Great that this is now permanent law. Attorney Mark Jinkins

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