Incentives for Charitable Distributions of IRA Assets

If you, or one of your clients, are age 70½ or older, the IRA rollover provision signed into law August 17, 2006, provides tax incentives to contribute individual retirement account (IRA) assets to nonprofit organizations. This is a limited time opportunity that, at present, is applicable only for charitable contributions made in 2006 and 2007.

The IRA rollover provision, approved as part of the Pension Protection Act of 2006, enables donors age 70½ or older to exclude from adjusted gross income the amount of “qualified charitable distributions” up to $100,000 per year from regular or Roth IRAs. The provision expires Dec.31, 2007.

How Does This Work?

1. The donor requests his or her IRA plan administrator to transfer funds to a charitable organization (donor-advised funds, supporting organizations, and private foundations are not included under the provisions—see Points to Bear in Mind below).
2. The IRA administrator must transfer funds directly to the charity.
3. This “qualified charitable distribution” is excluded from the donor’s adjusted gross income.

Benefits of the IRA Rollover:

• Qualified charitable distributions are excluded from the donor’s adjusted gross income.
• Only IRA distributions that would be included as taxable income if withdrawn by the account holder count as “qualified charitable distributions” and can be excluded from income.
• IRA account holders over age 70½ are subject to required distribution rules. Qualified charitable distributions from IRA accounts do count toward the owner’s required minimum distribution.
• “Qualified charitable distributions” (i.e., charitable rollovers of funds which can be excluded from a donor’s income) are not included as part of the donor’s maximum allowable charitable tax deductions. This means that IRA rollover gifts do not count toward 50% of their adjusted gross income limitation on charitable gifts of cash.
• Required IRA distributions may increase an individual’s adjusted gross income and increase the percentage of Social Security payments on which he or she has to pay tax. By choosing to make a charitable distribution with all or part of their required IRA distribution, donors may reduce income and reduce the percentage of social security subject to taxation.
• The IRA rollover allows donors who do not itemize deductions to contribute IRA assets to charities and enjoy tax benefits similar to those derived from claiming itemized charitable deductions.
• Taxpayers in states that do not allow itemized deductions and follow federal income inclusion rules may realize state tax benefits by making charitable qualified distributions from their IRAs.

Points to Bear in Mind:

• Qualified charitable distributions must be payable directly to the charity to be excluded from donor income. Steps should be taken to ensure the charity is expecting the distribution and the identity of the donor.
• Donors must have attained at least age 70 ½ on the date of distribution to the charity.
• The $100,000 annual limit is based on the aggregate amount of a taxpayer’s qualified charitable distributions in a year. An individual’s tax-free IRA donations may consist of one or more distributions, from one or more IRA’s, donated to one or more charitable organizations, as long as the aggregate amount does not exceed $100,000 in a year.
• IRA rollovers can not be used to fund split interest or life income gifts such as charitable gift annuities or charitable remainder trusts.
• Donors may not receive any quid pro quo benefits. If the donor receives any benefits that would typically reduce his or her charitable deduction (such as football tickets) no portion of the IRA distribution may be excluded from income.
• IRA rollovers to private foundations, donor-advised funds, and supporting organizations [defined in IRC section 509(a)(3)] are explicitly excluded from the new tax benefits. However, field of interest funds, designated funds, scholarships, and restricted and general endowment funds for which donors or their designees have no advisory rights are suitable recipients for charitable IRA rollovers.
• IRA accounts may be funded with both pre- and post-tax dollars and withdrawals may be taxable or nontaxable. Distributions of nontaxable assets do not count as “qualified charitable distributions” and donors cannot exclude such gift amounts from income. Donors may, of course, contribute such assets and claim a regular charitable deduction.

*The preceding overview of the IRA rollover provision is designed to provide a general understanding of the new law. Every effort has been made to ensure its accuracy, however this overview should not be construed as legal, accounting, tax or other professional advice. Prospective donors should consult with tax advisors before making any charitable distributions from IRAs.