IL Estate Planning Blog

Tuesday, June 13, 2017

IRA Charitable Rollover is Now Permanent

IRA Charitable Rollover Is Now Permanent

By Robert C. Anderson, CELA, CAP, LLM

With the passage of the PATH Act of 2015, the ability to make qualified charitable distributions is now permanent.

Taxpayers who are 701/2 or older can now exclude from taxable income up to $100,000 per year if they make a donation directly from an IRA to a charity. This is called a “charitable rollover” or a “qualified charitable distribution” (QCD). This is a significant advantage over deducting donations of cash to charities on Schedule A as an itemized deduction.

Introduced in 2006, charitable rollover donations were subject to annual Congressional sunset and reinstatement. So taxpayers could never really take advantage of this opportunity unless Congress acted at the end of the year. But thanks to the passage of the PATH Act of 2015 on December 18, 2015, the ability to do charitable rollovers is now permanent.

For those of us who are charitably minded, let’s compare charitable rollovers from IRAs made during your lifetime to regular cash or property donations intended to be deducted on Schedule A as itemized deductions. Most retired clients have paid off their home mortgages and do not have enough itemized deductions including modest charitable donations to warrant filing Schedule A. Therefore, donations to church and other charities are often wasted deductions. This is often true for charitably minded taxpayers 701/2 or older who own IRAs, and therefore must take an annual required minimum distribution (RMD) from their IRAs. Not only is the RMD taxable income to the retiree on both federal and state tax returns, but the RMD may increase taxation against the retiree’s social security benefits if other taxable income plus the RMD exceeds certain income thresholds. These unhappy events can be avoided by doing a charitable rollover of the RMD in which event the RMD never even shows up on your tax return as taxable income. You can of course do a charitable rollover that exceeds RMD up to $100,000 in any year.

Keep in mind that there are limits to this tax opportunity. Charitable rollovers only apply to persons aged 701/2 or older, and only to IRAs and ROTHs but do not apply to employer-provided plans, such as 401(k), simple IRA, or 403(b) plans. Also, charitable rollovers are only allowed to public charities, such as churches and foundations, and donor-advised funds may not receive them.

To accomplish a charitable rollover, you should contact the intended charity and your IRA sponsor to arrange for the direct donation; you cannot receive the IRA distribution. Your tax preparer will report the rollover as a QCD on Form 1040, Line 15a.

About the Author
Robert C. Anderson, CELA, CAP, Marquette, Michigan, is a frequent contributor to NAELA News and presenter at NAELA conferences

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