IRA Charitable Rollovers Become Permanent

On December 18, President Obama signed the Protecting Americans from Tax Hikes (PATH, because of course every law has to have a cute acronym) Act, which made a variety of tax law changes. Among¬†those changes: making IRA charitable rollovers (also known as “qualified charitable distributions,” which is the more accurate name, so we’re going to use that) permanent, and what it means from an estate planning perspective.


So, What is a Qualified Charitable Distribution?


An qualified charitable distribution allows IRA owners age 70 1/2 or older to give up to $100,000 per year to charity without having to pay taxes on the distribution. The distributions can come from a traditional IRA, a Roth IRA (distributions from a Roth are often, but not always, tax-free, so there might be a tax benefit here), or an inherited IRA as long as the beneficiary is at least 70 1/2 years old. Sorry, SEP and SIMPLE IRA owners, you can’t do this. If the IRA owner has a required minimum distribution due for that year (a traditional or an inherited IRA will likely have an RMD due), the charitable distribution satisfies that requirement.

Other keys to a successful qualified charitable distribution:

  • The money must be go directly from the IRA custodian to the charitable organization.
  • Most charities can accept these distributions, but supporting organizations¬†and donor-advised funds cannot–again, in most cases, this won’t be an issue, but if you’re concerned, you can always check with the organization you’re considering donating to, just ask them.
  • You’ll need to get an acknowledgement of the contribution from the charity. It’s not hard to get, but it is important. I’ve written on that topic before, if you’re curious.
  • You don’t get to take a deduction the way that you can for a charitable contribution, because the amount isn’t included in your gross income. If you could deduct it, you’d benefit twice, and that’s not going to work.


But, there was a catch…


Originally, these distributions were allowed only for a limited time. Each year, an extension would have to be passed. This led to a cycle where no one knew if the distribution would be extended, but the distribution was popular, so it would probably be extended, but you couldn’t really be sure…and so on. Then, with a few weeks or so left in the year, the federal government would extend the limit, and everyone would either breathe a sigh of relief or scramble to do their transaction.

That sort of worked; if nothing else, Congresspeople got credit for averting a tax increase, charities got their contributions, and people got to do their transactions–just within a limited time frame.

If you’re trying to put together a long-term strategy, however, it doesn’t work as well. The PATH Act, however, removes the time limit altogether, which basically makes the qualified charitable distribution permanent. Now that we know this rule isn’t subject to renewal every year, it’s much easier to consider this as part of an estate planning and charitable giving strategy.


How does this affect your strategy?


In some ways, this may be a more attractive way to give than a standard charitable contribution. Charitable contributions are only deductible if you itemize your deductions, so if you take the standard deduction, there’s no extra tax benefit. Also, charitable contributions are only deductible up to a certain percentage of your income; if your income is low, it might be hard to get much of a deduction.

If you aren’t dependent on your IRA for income, you’re age 70 1/2 or older, and you have some charitable interests, this is a strategy worth discussing. Even if you just contribute your annual RMD amount to charity, if you do not need the funds, this can save money at tax time.

Of course, like any estate planning strategy, you should check with your attorney or tax advisor before adopting this strategy.

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