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Income Tax Benefit of the IRA Charitable Rollover

Recent changes to income tax law may result in fewer individuals taking advantage of the traditional charitable deduction, but individuals can still receive a reduction in income tax by using their Individual Retirement Account (“IRA”) when completing charitable goals.

The Change

The Tax Cuts and Jobs Act was signed into law last December.  The new law, among a myriad of other tax code changes, effectively doubled the standard deduction for single filers and joint filers.  The Tax Policy Center of the Urban Institute and Brookings Institution has estimated that 75 percent fewer taxpayers will itemize deductions with the increased standard deduction.  The charitable deduction is part of the itemized deductions.  So, many taxpayers will no longer receive a charitable deduction unless they increase their charitable gifts.

The IRA Charitable Rollover

The IRA Charitable rollover allows owners of a Traditional IRA (or inherited Traditional IRA) who are age 70 ½ or older to make tax-free IRA contributions directly to qualified public charities.  Each age-eligible IRA owner can transfer up to $100,000 tax-free per tax year.  The IRA gift must be made on or before December 31 of the calendar year in which the taxpayer wishes to use the IRA Charitable Rollover gift vehicle for income tax purposes.  The check from the IRA must be made out to directly to a charity, not the IRA owner.

Advantages of IRA Charitable Rollover

Once a taxpayer turns 70 ½, the taxpayer must start taking “required minimum distributions” out of the taxpayer’s traditional IRA.  The required minimum distribution is typically taxable income to the taxpayer.  However, if the taxpayer utilizes the IRA Charitable Rollover, the amount given to the charity counts as part of the taxpayer’s required minimum distribution, but is not taxable income to the taxpayer.  This is a big benefit, especially if the taxpayer does not itemize deductions.   

Even for taxpayers who do itemize, the IRA Charitable Rollover can still save the taxpayer more tax than taking the IRA distribution into income and then donating it.  For example, by donating IRA funds directly to the charity from the IRA, the taxpayer lowers adjusted gross income.  This, in turn, may keep other income from being subject to the 3.8% net investment income tax.  It can also eliminate high-income premium surcharges for Medicare.

 

For taxpayers who must take a required minimum distributions and do not itemize, the IRA Charitable Rollover is a no brainer.  It will reduce tax for charitable gifts in which the taxpayer may not otherwise receive an income tax advantage.  For taxpayers who itemize, the IRA Charitable Rollover can still be of benefit as cited above.  The transfer process to complete an IRA Charitable Rollover is quick and requires minimal paperwork.  The key is to ensure that the check from the IRA is made out to the charity.  Contact your tax preparer or attorney to see how the IRA Charitable Rollover may benefit you.

Jeff is Certified as an Elder Law Attorney (CELA) by the National Elder Law Foundation, a distinction held by only a handful of lawyers in Indiana. For almost 20 years, he has focused on elder law, estate planning, long-term care planning, Medicaid planning, Veterans Affairs benefits planning, special needs planning, guardianships, and estate administration.

Jeffery D. Stinson, Certified Elder Law Attorney
Jeff is Certified as an Elder Law Attorney (CELA) by the National Elder Law Foundation, a distinction held by only a handful of lawyers in Indiana. For almost 20 years, he has focused on elder law, estate planning, long-term care planning, Medicaid planning, Veterans Affairs benefits planning, special needs planning, guardianships, and estate administration.