The IRA charitable rollover is a provision that allows individuals and their spouses to make distributions directly from their individual retirement accounts (IRAs) to charitable, 501(c)(3) organizations without first claiming the distribution as income. Prior to the implementation of this provision, taxpayers wishing to transfer assets from his or her IRA to charity first had to recognize the gift as income, make a transfer, and then claim a charitable deduction for the amount gifted. This often resulted in tax liability—even though the entire IRA distribution went to charity.
As with any tax provision, there are always questions. We have compiled a list of answers as to how this tax provision may affect you and your charitable giving in 2018:
Question: Does my IRA qualify for a rollover to Charity?
Distributions can only be made from traditional Individual Retirement Accounts. Charitable donations from 403(b) plans, 401(k) plans, pension plans, and other retirement plans are not eligible for the tax-free treatment. However, donors may be able to make qualified transfers from their pension or retirement plan—such as a 401(k) or 403(b)—to their IRA, and then make a charitable gift from their IRA account.
Question: What is a “Qualified Charitable Distribution”?
A qualified charitable distribution is income that individuals who are 70.5 or older may direct from their traditional IRA to an eligible 501 (c)(3) charitable organization. Only IRA distributions that would be included as taxable income if withdrawn by the account holder count as “qualified charitable distributions” and can be excluded from income. An individual’s RMDs (Required Minimum Distributions) are eligible under this provision.
Question: How much of my IRA can I roll over to charity?
The Federal Government has capped the now permanent annual exclusion provision at $ 100,000 for charitable distributions from individual IRAs.
Question: Do I have to pay tax on the transfer of my IRA to charity?
No. Individuals may exclude from gross income, the amount of otherwise taxable IRA distributions directly to an eligible charity.
Question: Can I receive the distribution from my IRA and then send it to a charity?
No. To be tax-free, the donation must go directly from the IRA account to the charity without passing through the donor’s hands.
Question: Do I have to itemize to get a charitable deduction when I roll over my IRA to a charity under this provision?
No. Under this particular provision, donors benefit by not having to recognize any gross income of the distribution directly from their IRA to a qualifying charity. Thus, the donor saves income tax that otherwise would have been charged on taxable distributions. To take a deduction for the contribution would result in a double benefit for donors which is explicitly prohibited.
Question: To which charities can I make Qualified Charitable Distributions?
Most contributions to public 501(c)(3) charities are considered qualified charitable distributions.
Question: Are there exceptions to donating to public charities?
Yes. Donors cannot donate to:
Supporting Organizations. Supporting organizations are public charities that operate under the U.S. Internal Revenue code in 26 USCA 509(a)(3). They are organizations that function as a private foundation with the exception that they are organized, operated, and controlled in the public interest and contain special limitations with regard to the tax code.
Donor-advised Fund. A donor-advised fund is a fund or account that is separately identified by reference to contributions of a donor or donors. The account is owned and controlled by a sponsoring charitable organization, while the donor retains advisory privileges with respect to the distribution and investment of funds in the account. While a donor/taxpayer can certainly direct their IRA funds be transferred to a donor-advised fund, the drawback will be that the funds are not excluded from the taxpayer’s gross income; therefore, the distribution will be taxable.
Private Foundations. An IRA owner can’t receive any benefit from the charitable distribution. Because private foundations involve control by donors, any small gift or reward to a Private Foundation charity could make the entire contribution ineligible for QCD treatment.
As well, gifts to charitable remainder trusts, lead trusts, pooled income funds, or charitable gift annuities are also not eligible. Gifts for which the donor receives a benefit that reduces the donor’s tax deduction—such as tickets or dinner—are also not eligible.
Question: What are the substantiation/receipting requirements of the IRA Rollover provision?
In order to benefit from the tax-free treatment, you must obtain written substantiation of each IRA rollover contribution from each recipient charity.
In most cases, your IRA administrator will send your charitable donation in the form of a check directly to the recipient charity and is not likely to include your name with the contribution. In requesting the distribution by letter, you should ask your IRA administrator to include your name and contact information with the contribution. You can request a written acknowledgment and/or donation receipt from the recipient charity asking it to acknowledge in written form:
The gift amount
That the organization is a public charity qualified to receive donations from IRAs
That the gift will not be distributed to a donor-advised fund or supporting organization
That no goods or services were received by you in exchange for the contribution.
If you have reached the age of 70.5 and would like to consider the rollover of your IRA or RMD, give Legacy Global Foundation a call today to discuss the opportunity you have to do good things for charity while getting a break on your tax bill.