Last week Congress passed legislation permanently extending the Charitable IRA – which for many people has been the most tax-efficient way to make their charitable donations. This provision enabling IRA charitable transfers has been highly popular since it was first passed a decade ago, but lawmakers have nearly allowed it to expire five times, leaving donors in the dark for much of the year as to whether it would be extended. Now the uncertainty has been resolved, but donors will need to move quickly to benefit in 2015. Transfers must be made before calendar year-end.
The legislation provides that, retroactive to the beginning of 2015, Americans age 70 1/2 and older may transfer up to $100,000 per year from IRAs to charity—without incurring federal income taxes today or estate and income taxes in the future. If married, each spouse can transfer up to $100,000 from his or her IRA annually. The donations count as part of the IRA owner’s required annual withdrawal—so if the owner’s minimum withdrawal is $25,000 in 2015 and she makes $10,000 of qualified donations with IRA assets, she only has to withdraw $15,000 for 2015.
A December 16 Wall Street Journal article by Laura Saunders noted several benefits for taxpayers who plan to give money to charity. “While there is no tax deduction for the donated assets, they don’t count as income either—unlike most withdrawals from traditional IRAs. The lower income can help a person avoid taxes on Social Security benefits or higher Medicare premiums. Reporting lower income may also help IRA donors remain in lower tax brackets or avoid backdoor tax increases that apply as income rises—such as the 3.8% net investment income surtax. Its threshold is $250,000 of adjusted gross income for joint filers and $200,000 for single filers. In addition, some donors can’t use charitable deductions because they no longer list write-offs on Schedule A. Instead they take the standard deduction, which is $6,300 for singles and double that for married couples filing jointly in 2015.”
Some key information for donors (with thanks to the WSJ):
- IRA contributions can be made to any tax exempt 501(c)(3) organization, but not to a donor-advised fund, or a charitable gift annuity.
- The IRA donation can fulfill an existing pledge to the charity.
- The assets must be transferred directly from the IRA custodian, such as a bank or brokerage, to the charity.
- There can be no benefit back to the taxpayer from the charity, even a dinner or a favor.
- The taxpayer must have proper proof of the IRA transfer in hand before filing his tax return. For more information, see IRS Publication 526.
- IRA donors can’t return required annual payouts to their accounts. For example, if an IRA owner has a $15,000 required withdrawal for 2015 and has already taken out that amount because he was worried Congress wouldn’t renew the provision, he can’t return $2,000 to the account in order to make a $2,000 IRA transfer to charity this year.