IRA Charitable Rollovers

Directly roll over your IRA to a charity and save taxesFor charitable-minded taxpayers older than 70 ½ with an Individual Retirement Account (IRA), a Charitable Rollover could be a very tax-friendly way to donate to a worthy cause.  Even better, this once temporary provision has now been made permanent as of the signing of the PATH Act on December 18, 2015.

What is a Charitable Rollover?

Prior to the Pension Protection Act of 2006, if an individual wanted to use funds from an IRA to donate to a charity, the tax-payer would first need to recognize the IRA funds as income, then donate to the charity, thus generating a charitable deduction, which the tax-payer would claim on his or her taxes.  The process of recognizing the income would generate a tax liability for the tax-payer, despite the fact the funds were being donated.  With the passage of the Pension Protection Act of 2006, the tax-payer could simply roll the funds over to the charity and NOT recognize the funds as income.  The rollover amount is limited to $100,000 per year.

What’s the difference?

So, what’s the difference if you exclude the charitable deduction from income versus getting a deduction for the charitable deduction?  It could possibly be a very big difference.  First, it’s important to understand the mechanics of income and charitable deductions.  On page one of Form 1040, you will see your income items (W2 wages, profit from businesses, capital gains, etc.) and “above-the-line” deductions.  Above-the-line deductions can be taken whether you itemize or not.  These income items and above-the-line deductions total up to your Adjusted Gross Income, which is at the bottom of page one of Form 1040.  Charitable deductions are claimed on Schedule A – Itemized Deductions and help to lower your taxable income.  Itemized deductions can be found at the top of page two of Form 1040.

Many retired tax-payers don’t itemize their deductions because the total of deductions doesn’t equal or exceed the standard deduction (Married Filing Joint in 2016 gets a $13,850 standard deduction for seniors).

In addition, higher adjusted gross income also impacts many other parts of a tax-payers tax return.  For instance, taxability of social security, deduction and exemption phase-outs, and the Alternative Minimum Tax can all be adversely effected by higher income.  Lowering ones adjusted gross income can be very beneficial to lowering overall tax liability.

Do you still get a deduction?

If the tax-payer chooses to roll the fund over to the charitable organization, an itemized deduction is NOT claimed.  To claim an itemized deduction while excluding the deduction from income would be double counting the contribution.

Help with RMD?

Many retired tax-payers find themselves in a position where they are required to take a distribution from their IRA, a Required Minimum Distribution.  However, they may not need the funds and/or the distribution will adversely impact their tax situation.  A charitable rollover can help eliminate the impact from the RMD.  By simply rolling the RMD over to a charity, the tax-payer can eliminate the distribution from their income AND the rollover counts towards the RMD for that tax year.

Are there limitations?

As with all good things in life, there are limitations on the Charitable Rollover.  The tax payer must be over the age of 70 ½ and the rollover can only be done from and IRA, not a company sponsored plan, such as a SIMPLE IRA or 401k.  The rollover must be made directly from the IRA trustee to an eligible charity.  Donor-advised funds and supporting organizations are not considered eligible.  Finally, while the tax-payer can make several rollover contributions every year, the total cannot exceed $100,000.

For those tax payers that may not itemize or have high incomes that phase them out of charitable deductions, a Charitable Rollover from an IRA can be an exceptional tax reduction strategy.