IRA Charitable Rollover Now a Permanent Tax Advantage
IRA charitable rollovers can now officially become part of a tax planning strategy. Since 2006, the benefit had to receive approval each year as part of the tax extender package. Congress made the tax advantage a permanent part of the tax code with its approval on December 18, 2015. Charitable rollovers qualify retroactively to January 1, 2015.
How the Charitable Rollover works
- Taxpayers age 70 1/2 or older may donate up to $100,000 directly from IRAs or Roth IRAs to qualifying charities without having to pay income tax. The funds may not flow through the IRA owner, but must be designated to the charity or church. Such a donation counts toward a taxpayer’s IRA annual required minimum distribution (RMD). (Note: donations from a SEP or SIMPLE IRA aren’t eligible.)
- The rollover amount is not eligible for an itemized charitable tax deduction, but is excluded from Adjusted Gross Income (AGI) for tax purposes. (Therefore, the benefit may more attractive for traditional rather than Roth IRAs.) Married individuals filing a joint return may each give up to $100,000 from each spouse’s IRA, for a $200,000 exclusion from gross income.
- The tax advantage is clear for taxpayers who do not itemize deductions on Form 1040. But the math may still be favorable for those who do itemize. Keep in mind that charitable contributions are limited to 50% of AGI.
- The charity must provide an acknowledgement to the donor stating that no goods or services were received in exchange for the gift.
Benefits of lowering Adjusted Gross Income
Direct IRA rollovers that reduce AGI may benefit many non-tax and tax calculations. Your amount of AGI affects the following:
- Cost of Medicare Part B and prescription drug premiums
- 8% tax on net investment income
- Social Security income taxability
- Roth IRA contribution eligibility
- Medical expenses for seniors (limited to the excess over 10% AGI)
- Itemized deductions (reduced by 3% of AGI over a threshold)
- Miscellaneous deductions (limited to the excess over 2% of AGI)
Donations to charities must be received by December 31 for the current tax year. The process for a rollover is different with each IRA administrator, so check with your administrator about the requirements and time needed to process. Talk with your Salmon Sims Thomas tax advisor about your specific tax situation.