1. Why do donors want to give IRA assets to their community foundation?
After decades of deliberate saving and favorable investment returns, some retirees have more money in their IRAs than they'll ever need. For larger estates, a good portion of IRA wealth goes to estate taxes and income taxes of non-spousal beneficiaries; heirs may receive only 25 percent to 30 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.
2. 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:
3. In the past, how did the tax law treat charitable gifts made from IRAs?
Under past law, 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 new 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. (Charitable deductions are limited by legal restrictions, such as the percentage of adjusted gross income [AGI] limitation on charitable deductions and the 3 percent floor on all itemized deductions. If an individual does not itemize on his or her income tax return, no charitable deduction can be taken.) As a consequence of this unfavorable tax treatment, very few individuals donated IRA funds to charity during their lifetimes.
4. How has the tax law changed?
The Pension Protection Act of 2006 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. In tax years beginning after December 31, 2005, 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 time-limited. It will not apply to any distribution made in taxable years beginning after December 31, 2007.
5. 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 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.
6. 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. A $100,000 charitable distribution may be made in 2006 and again in 2007.
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.
7. 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.
8. 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.
9. 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.
10. 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.
IRA Charitable Rollover
Revised January 6, 2013
The Pension Protection Act of 2006 (PPA) permitted individuals to roll over up to $100,000 from an individual retirement account (IRA) directly to a qualifying charity without recognizing the assets transferred to the qualifying charity as income. While this initial provision expired on December 31, 2007, it has been extended several times. On January 2, 2013, President Obama signed the American Taxpayer Relief Act of 2012 (H.R. 8) into law, extending the provision until December 31, 2013. Note that the new law simply extends the charitable rollover and, other than some modifications regarding timing for 2012 distributions, did not make substantive changes to the operations of the provision.
What is an IRA charitable rollover?
The law uses the term “qualified charitable distribution” to describe an IRA charitable rollover. A qualified charitable distribution is money that individuals who are 70½ or older may direct from their traditional IRA to eligible charitable organizations. The provision has a cap of $100,000 for charitable distributions from individual IRAs each year. Individuals may exclude the amount distributed directly to an eligible charity from their gross income.
What is the new expiration date of this provision?
This provision is still time-limited. It applies only to qualified charitable distributions made before January 1, 2014.
Does a donor also receive a charitable deduction when they roll over assets to a charity under this provision?
No. Under this provision, donors benefit by not having to recognize the amount contributed directly from their IRA to a qualifying charity. However, because donors exclude this contribution from their gross income, they cannot take a charitable contribution deduction for the contribution; to do so would result in a double benefit for donors and that is explicitly prohibited.
To which charities may donors make qualified charitable distributions?
Most contributions to public charities—other than supporting organizations—are considered qualified charitable contributions. However, distributions from IRA accounts to donor advised funds held by public charities are not considered qualified charitable distributions under this charitable rollover provision.
Individuals can make qualified charitable distributions to a private operating foundation or to a private foundation that elects to meet the conduit rules in the year of the distribution. Neither private non-operating foundations nor split interest trusts are eligible for special treatment as qualified charitable distributions under the law.
Will an IRA distribution to a fund held by a community foundation qualify for this special treatment?
Yes, distributions to almost all types of funds typically held by community foundations—such as scholarship, field-of-interest, and designated funds—qualify. The exception to this general statement is that a distribution to a donor advised fund will not qualify for this special treatment.
What if donors want to contribute more than $100,000 to a qualified charity from an IRA?
The law limits the amount that donors are able to exclude from their income to $100,000. If donors wish to take funds from their IRA to contribute more than $100,000 to charity, they cannot exclude the additional amount from their gross income. Rather, they must follow the general rules pertaining to percentage limitations and itemized contribution reductions. (Both are discussed below.)
Can donors contribute IRA assets to a donor advised fund?
Yes. However, since such distributions do not count as qualified distributions from IRAs under these special rules, donors will have to first recognize those distributions as income. They then must calculate their charitable deduction according to the general rules pertaining to percentage limitations and itemized contribution reductions discussed below.
Under what circumstances will this special treatment of an IRA charitable rollover most likely benefit donors?
Generally, this new provision benefits donors who itemize deductions and whose charitable contributions are reduced by the percentage of income limitation. Traditionally, when individuals receive a distribution from their IRA and make a corresponding charitable contribution, they must count the distribution as income and then receive a charitable deduction for any amounts they transferred to charity. For higher income taxpayers (see Definitions, below), the charitable contribution deduction they receive may not totally offset the taxes they must pay for receiving the distribution from their IRA. In such cases, donors would potentially benefit more by using the charitable rollover provision when making a charitable donation.
Other donors who may benefit: individuals who do not usually itemize their deductions and individuals in states where the operation of state income tax law would offer greater benefits as a result of a charitable rollover. Donors will need to work with their professional advisers to determine the effect of these rules on their specific tax situation. This provision will also likely benefit donors whose charitable contributions are reduced by the itemized deduction reduction. (See Definitions, below.)
How do individuals make a qualified charitable distribution?
Individuals must instruct their IRA trustee to make the contribution directly to an eligible charitable organization.
Should a charity receiving a contribution directly from an IRA provide a gift acknowledgement?
Yes. Individuals making a charitable contribution using IRA funds must obtain a contemporaneous written acknowledgement of the contribution to benefit from this new provision. IRS Publication 1771, Charitable Contributions—Substantiation and Disclosure Requirements contains information about substantiation of charitable contributions.
May a charity provide any goods or services in return for the contribution?
No. If donors receive any goods or services (e.g., tickets to a fundraiser) that would have reduced their charitable deduction had they made an outright gift to the charity, the rollover of assets from an IRA will not qualify for the tax-free treatment under this provision. Gifts to the donor that are disregarded (i.e., public recognition, token gifts, and insubstantial benefits) will not disqualify the contribution from the tax-free treatment. IRS Publication 1771, Charitable Contributions—Substantiation and Disclosure Requirements contains information about disregarded benefits.
Can individuals make a qualified charitable distribution for split interest gifts?
No. Charitable lead trusts and charitable remainder trusts are examples of giving vehicles that are not eligible to receive qualified charitable distributions. Further, because individuals cannot receive a benefit in return for an IRA distribution, any contribution donors make in return for a charitable gift annuity would not be eligible for the tax-free treatment.
How will charitable distributions impact the minimum required distributions from a taxpayer’s IRA?
Shortly after individuals reach the age of 70½, they are generally required to receive distributions from their traditional IRA. For the purposes of minimum required distributions, the IRS treats distributions from an IRA the same, whether individuals use the distribution for personal purposes or direct the distribution to a charity.
Percentage of Income Limitation
In any given year, donors may not deduct more than 50 percent of their income for gifts of cash to
public charities (30 percent, if giving to private foundations). Although taxpayers can carry forward amounts greater than 50 percent and deduct those amounts in future years, they will face an immediate tax bill. These taxpayers also 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.
Itemized Deduction Reduction
In 2013, higher income taxpayers will again be required to reduce their itemized deductions by 3 percent of the amount by which their income exceeds a certain amount. This reduction of itemized deductions is often referred to as the Pease Limitation.
Taxpayers subject to the reduction can lose up to 80 percent of the value of their deductions because most itemized deductions must be reduced by 3 percent of the amount by which the taxpayer’s income exceeds a certain amount [which is adjusted annually for inflation]. For 2013, the threshold is $250,000 for individuals, $275,000 for heads of households, and $300,000 for married couples filing jointly. A large transfer from an IRA can increase a taxpayer’s income to the point where this 3 percent reduction applies.
Example: In 2013, a married couple filing jointly has $500,000 in adjusted gross income (AGI). Because the couple’s AGI exceeded the $300,000 threshold, the 3 percent reduction will apply to the couple’s itemized deductions.
Excess of couple’s AGI over $300,000 $200,000
3% reduction x 3%
Reduction of itemized deductions $6,000
The couple’s itemized deductions will be reduced by the lesser of $6,000 or 80% of the itemized deductions.
Private Foundation Conduit Rules
A private foundation may elect to meet the conduit rules and pay out 100 percent of the contributions the foundation received in its tax year by the 15th day of the third month after the close of that tax year, in addition to meeting its regular 5 percent distribution requirements. A private foundation may elect to be or not to be a conduit private foundation from year to year.
While a private non-operating foundation generally cannot receive a qualified charitable contribution from an IRA, a private non-operating foundation that elects to meet the conduit rules may receive such contributions.