The bailout bill, known as the Emergency Economic Stabilization Act of 2008, contains many little-known provisions, including the retroactive extension of the IRA charitable rollover.
If you have clients 701/2 or older who are individual retirement account owners or beneficiaries and who are charitably inclined, they can fulfill their philanthropic intentions through their IRA, a tactic that is very tax-efficient.
Many IRA owners would like to tap this account for charitable donations. On the surface, this seems like a simple trade-off. A client might think he or she can withdraw money from an IRA and donate the same amount to charity, effectively offsetting the income from the IRA distribution with a charitable deduction.
Charitable deductions face limits that are related to the taxpayer's adjusted gross income. If a client makes a donation that is very large, compared with his or her AGI, the tax deduction might be partially deferred or partially unavailable.
Furthermore, clients who want to donate IRA funds to charity generally have to take money from their IRA and recognize taxable income. IRA withdrawals usually swell a taxpayer's adjusted gross income, and a higher AGI can raise taxes in many areas of a tax return.
To a limited extent, this situation was addressed in the Pension Protection Act of 2006. An IRA charitable rollover was allowed for some taxpayers in 2006 and 2007. When the bailout bill was signed into law Oct. 3, it retroactively extended the IRA charitable rollover for all of 2008 through the end of 2009.
This tax provision allows qualified charitable distributions to be made by IRA owners or IRA beneficiaries on or after the date they reach 701/2. The qualified charitable distributions can be up to $100,000 in a calendar year.
For married couples, each spouse can make qualified charitable distributions up to $100,000 if they both have IRAs and are both at least 701/2. However, the $100,000 limit is per-person, so a client with multiple IRAs is still capped at $100,000 worth of qualified charitable distributions in each calendar year.
Qualified clients can make donations directly from an IRA to an eligible charity. Most charities recognized by the IRS are eligible, but there are exceptions.
A client who makes a qualified charitable distribution to an eligible charity won't get a charitable deduction but won't pick up any taxable income either. Therefore, most clients will come out ahead making qualified charitable distributions rather than withdrawing IRA funds and then making deductible contributions.
As you can see, clients eligible to make qualified charitable distributions typically must take required minimum distributions from their IRA. If they have charitable intentions and have not yet taken their required minimum distribution for 2008, you should advise them to use qualified charitable distributions for these donations.
Suppose, for example, Bob donates $10,000 to charity each year, typically with year-end contributions. His required minimum distribution from his IRA this year is $10,000.
Bob can direct his IRA provider to distribute $10,000 to specified charities by Dec. 31. This will satisfy his required minimum distribution for 2008 yet keep that income from swelling his AGI. A larger AGI would reduce his eligibility for various tax deductions, exemptions and credits.
Although it's vital that Bob not touch that $10,000, if he wants to avoid recognizing taxable income, it's also crucial that the charities know his name and address. The usual rules apply for substantiating charitable contributions, so his qualified charitable distributions must be supported by a receipt and a statement from the charity that no consideration was received.
About the only flaw in this scenario is that Bob can't reverse required minimum distributions already taken. Suppose that when his financial adviser calls him to tell him about this provision of the new law, Bob already has withdrawn $10,000 from his IRA this year to satisfy his required minimum distribution. He can't put that $10,000 back in and then make a $10,000 qualified charitable distribution. This prohibition applies even if Bob made his $10,000 withdrawal within the previous 60 days. A required minimum distribution can never be rolled over, so it can't be undone.
Ed Slott, a certified public accountant in Rockville Centre, N.Y., created The IRA Leadership Program and Ed Slott's Elite IRA Advisor Group to help financial advisers and insurance companies become recognized leaders in the IRA marketplace. He can be reached at irahelp.com.
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