If your client is charitably inclined and has an individual retirement account that is subject to required minimum distributions (over age 70½), it pays to make a direct transfer to the charity from the IRA, rather than using other funds for their donations.
There is no charitable deduction permitted, but the distribution isn’t included in income.
If your client is charitably inclined and has an individual retirement account that is subject to required minimum distributions (over age 70½), it pays to make a direct transfer to the charity from the IRA, rather than using other funds for their donations.
There is no charitable deduction permitted, but the distribution isn’t included in income.
The transfer also counts toward the client’s required minimum distribution. That will keep your clients’ adjusted gross income lower than it would be otherwise and cut their tax bill.
This transfer is one of the many provisions of the Pension Protection Act of 2006, but it ends after this year.
The Internal Revenue Service has issued some clarifications of the original law that received little attention and still are not well known.
IRS Notice 2007-7, released Jan. 10, held some surprises. The first is that IRA beneficiaries, as well as the IRA owner, will be allowed to make qualified charitable distributions.
The charitable distribution will be qualified only if the distribution is made on or after the date the IRA owner or the beneficiary reaches age 70½, not in the year the owner or beneficiary reaches that age. This isn’t how other age 70½ IRA rules are interpreted.
For married couples where each spouse has an IRA, each can transfer up to $100,000 to charity, as long as they meet all the qualified-charitable- distributions qualifications.
However, gift splitting for charitable distributions isn’t allowed. An IRA owner isn’t able to make a distribution of $200,000 and split that gift with his spouse.
Another surprise came with regard to charitable transfers from simplified employee pension (SEP) and savings incentive match plan for employees (SIMPLE) IRAs. Notice 2007-7 says that you can make a transfer from those types of IRAs as long as they are not “ongoing.”
Such a plan is defined as one where an employer contribution is made for the plan year ending with or within the IRA owner’s tax year in which the charitable contributions are made.
A check payable to a charity that is sent to the IRA owner for delivery to the charity will be treated as a direct payment. If this is done close to the end of the year, make sure your clients meet applicable deadlines for delivery before yearend.
A distribution from a checkbook IRA to a qualified charity will be considered a qualified charitable distribution. The notice says that a check from an IRA payable to a charity and delivered by the IRA owner to the charity will be considered a direct distribution from the IRA custodian.
A charitable distribution to a charity where the IRA owner has an outstanding pledge will be treated as a qualified charitable distribution and not as a prohibited transaction.
Here is a recap of the original rules from the PPA, allowing direct transfers from IRAs to charity for those age 70½ or older, plus the recent IRS revisions:
• Applies only to IRA owners or beneficiaries age 70½ and over.
• Applies to IRAs, Roth IRAs and inactive SEP and SIMPLE IRAs. It doesn’t apply to distributions from any employer plans.
• Applies only to direct transfers of IRA funds to charities and not gifts made to grant-making foundations, donor-advised funds or charitable-gift annuities.
• No split interest gifts of any type will qualify.
• Gifts must be made by Dec. 31.
• The charitable donation from the client’s IRA will satisfy their required minimum distribution, but the IRA distribution isn’t includable in income.
• One can’t take a deduction for the charitable contribution.
• For a married couple where each spouse has their own IRA, each can transfer up to $100,000 from their own IRA. If more than $100,000 is transferred from the IRA to a charity, there is no carryover to a future year. The excess is taxable income, and a charitable deduction can be claimed if the taxpayer itemizes.
• The contribution to the charity has to be entirely deductible if it isn’t made from an IRA. There can be no benefit back to the taxpayer.
• The distribution from the IRA to a charity can satisfy an outstanding pledge to the charity without causing a prohibited transaction.
• The charitable substantiation requirements apply.
• Qualified charitable distributions apply only to taxable amounts. No basis (non-deductible IRA contributions) can be transferred to charity. This is an exception to the pro-rata rule. Only taxable amounts in a Roth IRA will qualify.
You should act quickly, as the provision ends at the end of this year, unless extended by Congress.
Ed Slott, a certified public accountant in Rockville Centre, N.Y., has 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.
