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2016-10-24

IRA Roll Over Can Benefit Donor And Charity

By Ken Kurz

Director of Marketing and Development, VCU Health Community Memorial Hospital

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 December 18, 2015 the President signed the PATH Act making this special provision permanent.

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 now permanent.

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 (see Definitions, below). Neither private non-operating foundations nor split interest trusts (such as charitable remainder 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.

Is a donor limited to one IRA charitable distribution per year, or can a donor request multiple transfers?

Donors aged 70 ½ or older are limited to a maximum of $100,000 in any one year as an IRA charitable distribution, however there is no requirement that the entire amount be made in one transfer or that the entire amount go to a single qualified charitable organization. Donors can request multiple direct transfers from their IRA to qualified charities in a year, but only $100,000 will be excluded from income as an IRA qualified charitable distribution.  

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.) 

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, 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.

How do individuals make a qualified charitable distribution?

Individuals must instruct their IRA trustee to make the contribution directly to an eligible charitable organization.

A donor wants to utilize the IRA charitable distribution for his/her 2016 required minimum distribution. Does the community foundation need to physically receive the check by December 31, 2016 or is it sufficient for the check to be put in the mail?

To take advantage of the IRA charitable distribution, the distribution must be sent directly from the IRA company to the charity. IRS Publication 526 discussed the rules for delivery of charitable contributions and explains that generally, the date of mailing would qualify as the date the gift is made. Accordingly, if the IRA company mails the distribution check to the charity by December 31st, it would be counted as an IRA distribution in 2016.

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.

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.

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