Virtual Giving Planned Giving Websites

Charitable IRA Rollover

Take Advantage of IRA Rollover Now! Window of Opportunity Closes 12-31-07

If you are age 70 ½ or older, new legislation now allows you to make cash gifts totaling up to $100,000 a year from your traditional or Roth IRA to qualified charities without incurring income tax on the withdrawal.  This is good news for people who want to make a charitable gift during their lifetime from their retirement assets, but have been discouraged from doing so because of the income tax penalty. The provision is effective for tax years 2006 and 2007 only, so you must act by December 31 to take full advantage.

The Pension Protection Act of 2006 contains a two-year IRA Charitable Rollover provision that allows people age 70 ½ or older to exclude up to $100,000 from their gross income for cash gifts made directly to a qualified charity. The law is set to expire on December 31, 2007. 

The provision permits distributions from traditional IRAs or Roth IRAs to qualified public charities and private operating foundations as described in IRC 170 (b)(1)(A). Whereas such distributions were previously income taxable, they are now excludable from gross income, eliminating the income tax penalty for such charitable gifts. The following limitations and restrictions apply:
 

• The individual for whose benefit the plan is maintained must have attained the age of 70 ½ or older at the time of gift.
• Qualified charitable distributions may not exceed $100,000 in the aggregate in any taxable year.
• The provision applies to tax years 2006 and 2007 only. Qualified distributions must be made by December 31 of each year.
• Qualified distributions must be made directly to the charity by the plan trustee. Contact your plan trustee for information on how to initiate a transfer.
• Qualified charitable distributions may be excluded from gross income for Federal Income tax purposes. However, no federal income tax deduction is available. Certain states may not exclude gift amounts withdrawn from an IRA for state income tax purposes.
• Only outright gifts are eligible. Distributions to charitable gift annuities, charitable remainder trusts, pooled income funds and other split-interest arrangements do not qualify for special tax treatment.
• Qualified contributions may be counted toward the Minimum Required Distribution (MRD) for a donor’s IRA accounts.
• Qualified contributions are not subject to the deductibility ceiling (50% of AGI) or the 2% rule that requires that itemized deductions be reduced by 2% of AGI in excess of $150,500 for tax year 2006.
• Gifts from retirement accounts other than IRAs—such as 401k, 403b, and SEP accounts—are not eligible. Donors may be able to make qualified transfers of money from other accounts to their IRA, and then make a charitable gift from their IRA. Check with your tax adviser.
• Distributions to Supporting Organizations as described in IRC 509(a)(3) and Donor Advised Funds as described in IRC 4966(d)(2) are specifically excluded.
• Donors who do not itemize their Federal income tax returns may make qualified IRA gifts and exclude such gifts from their reportable income.

 
Who is most likely to benefit?

• Individuals who take mandatory minimum withdrawals, but don’t need additional income.
• Individuals who wish to give more than the deductibility ceiling (50% of AGI).
• Individuals who are subject to the 2% rule that reduces their itemized deductions.
• Individuals whose major assets reside in their IRAs and who wish to make a charitable gift during their lifetime.
• Individuals who intend to leave the balance of their IRA to charity at death anyway
  

How will an IRA gift impact my taxes?

There has been some confusion on the proper procedures for making charitable contributions from IRA’s, and how to report these gifts on your income tax return. As you know, the Pension Protection Act of 2006 provides that in 2006 and 2007, a person over the age of 70 and ½ can transfer from an IRA up to $100,000 to qualified public charities and exclude the gift from taxable income. Fortunately, the IRS has come out with some clarifying instructions that should make this process easy.

What You Should Know

1. Donors cannot take a charitable income tax deduction for these donations. Nor can they donate their IRA assets to a donor advised fund, private foundation or supporting organization. Tax-free IRA rollovers can only be made to qualifying public charities.
2. You can make a tax-free rollover to charity for up to $100,000 in the year. If you and your spouse each have an IRA account, you can each make a maximum $100,000 gift.
3. Charitable contributions from your IRA must be made directly from your IRA to the charity. This can easily be accomplished in two ways:
   1. Instruct your IRA custodian to draw up a check made payable to us and send it to directly to our address. Be sure to instruct your IRA custodian to reference your name when they send the check. Also, if you wish your IRA gift to be restricted in any way, please write us a note or call us. Otherwise your gift will be used for our general support.
   2. Instruct your IRA custodian to draw up a check made payable to us and mail it to you. You can then mail or deliver it to us with your instructions on how you wish your gift to be used.
4. We cannot send you a gift receipt for your IRA gift, but we will acknowledge it in writing. This acknowledgement should be kept in your records as verification of your tax-free contribution.
5. Your IRA custodian will send you a 1099-R by the end of January indicating your total IRA distribution for the year, including those distributions to charity. Tax rules for reporting the portion of a distribution that is transferred to charity is completely up to the donor. Your IRA custodian has no obligation to determine if your gift qualifies under the law for tax exclusion.
6. On your tax return, you will report your entire IRA distribution for the year on line 15a of Form 1040. If your entire IRA distribution was sent to a charity, enter 0 on line 15b to indicate the taxable amount. If a portion of your distribution was sent to you for your use, then include only this amount on line 15b. See page 25 of the IRS instructions for Form 1040 for more information.

From IRS Form 1040

Example

Gary, age 76, is required to withdraw a minimum amount of $10,000 from his IRA this year, all of which would by subject to income tax, However, he decides to give half of this or $5,000 to us and keep $5,000 for his use. He instructs his IRA to send his $10,000 in two checks, one for $5,000 payable to him and a second check for $5,000 payable to us. Gary collects both checks and sends us the $5,000 payable to us with his instructions on how he wants his gift to be used.

At the end of January, Gary’s IRA custodian sends him a 1099-R indicating the full distribution for $10,000. Gary will then report the full IRA distribution on his 1040, line 15a. However, only $5,000 will be reported on 15b as the taxable amount.

If you have any further questions about this, please don’t hesitate to call us. We would be more than happy to walk you through the procedures for making this kind of gift, so that you are comfortable and satisfied with the result.

This information is intended to provide general guidance and is not a substitute for professional counsel. Please consult with your legal or tax advisors for professional advice.

PLEASE NOTE: This summary was prepared as an educational service to its clients and others and is not intended as legal or tax advice. Consult your own legal or tax advisor before making any decision based on this information.