Charitable Rollover


In August, 2006, President Bush signed H.R.4, the Pension Protection Act of 2006, into law. This legislation provides clients with tax incentives for charitable rollovers if they are age 702 or older. You are now be able to make outright gifts using funds from your individual retirement accounts (IRAs) without any undesirable tax effects. Prior to this law, if you wanted to make a gift to charity using funds from their IRA, you would have to first withdraw the desired amount, then deposit the funds into a checking account and write a corresponding check to the charitable organization—which would force you to include any amount withdrawn from the IRA in your gross income. You could then take a charitable deduction for the gift - but only up to 50 percent of your adjusted gross income. In effect, this caused many to pay more in income taxes than they would have if they hadn’t made a gift at all!! For example, a client withdraws $50,000 from an IRA and gives it to charity. Prior to the gift, the client had $20,000 in adjusted gross income. Now the total adjusted gross income is $70,000, but the donor can deduct only 50 percent, or $35,000, of the $50,000 gift. Under the new law, you can make these IRA gifts without including the IRA distribution in your gross income. However, you will NOT be able to deduct the distribution as an itemized deduction.

CHARITABLE ROLLOVER PROVISIONS

  • You must be age 702 or older on the date the distribution is made.
  • Gifts equaling as much as $100,000 can be made now until December 31, 2007.
  • You must make the gift via a direct transfer to a public charity and not take receipt of the funds.
  • The funds must come from an IRA or Rollover IRA. Other types of retirement accounts including SEPs, SIMPLEs, TSAs or 403(b)s, 401(k)s, and pension or profit sharing accounts are not eligible. For those who are 70½ or older and have funds in these other retirement accounts, you may be able to move a portion of that money into a Rollover IRA; then a charitable rollover could be made from the Rollover IRA. For the best results, make sure these transactions occur on separate days
  • Gifts to charitable trusts, donor advised funds and supporting organizations are not eligible for these tax benefits. [See IRC 408(d)(8)(B)(i)]. This type of IRA gift also cannot be made in exchange for a charitable gift annuity.
  • Gifts under this provision are not taken into account in determining the client’s deduction for other charitable contributions. Since IRA gifts under the new law are not deductible, the amount given under this provision has no bearing on the amount of other charitable gifts given during the calendar year.
  • You cannot receive an economic benefit or quid pro quo from the gift or else the entire gift is not an eligible charitable rollover. (See the Joint Committee on Taxation’s technical explanation of H.R.4, Page 267.)
  • Further, the charity must provide sufficient substantiation to the donor. Appropriate substantiation will likely include statements to the following:
    • The IRA funds were not contributed to a donor advised fund, a supporting organization, a charitable trust or a charitable gift annuity.
    • The gift was from an IRA.
    • The gift was transferred directly from the donor’s IRA to the charitable organization.
    • It is the donor’s intention that this gift qualifies as a charitable distribution from the IRA under IRC 408 (d)(8). There should be no statements that the gift is deductible.

WHO CAN BENEFIT

Those who do not itemize their federal tax deductions can benefit greatly from H.R.4. Without this law, they would have to pay taxable income on their IRA withdrawal, and yet they couldn’t deduct it as a charitable gift because they take the standard deduction. Those with higher incomes (single or married filing jointly with income greater than $150,500; married filing separately with incomes greater than $75,250) causing them to lose part of their itemized deductions (i.e., a 2 percent phaseout) will also benefit because the distribution from the IRA will no cause their adjusted gross income (AGI) to inflate. Any persons who live in states that do not allow state income tax deductions for charitable gifts will also benefit. Without the law, these taxpayers would have to claim the IRA distribution as taxable income on their state and federal returns, and could deduct it on the federal return - subject to the AGI limits - but wouldn’t receive a state income tax deduction for the gift. Thus, they would pay more in state income tax.

HOW YOU CAN MAKE GIFTS

In order to take advantage of this new law, you must contact your IRA administrator for the forms necessary to transfer gifts directly to public charities. It is important that the funds are transferred directly form the IRA to charitable organization. You cannot receive the funds first and then make a gift using the proceeds form the distribution. It will be up to each IRA administrator to determine what particular forms or procedures will be needed to process an IRA gift. Expect different procedures with different institutions. As with many new laws and regulations, you may need to be patient with some IRA administrators who may not be as familiar with handling these transactions.

Courtesy of Attorney James C. Thompson and the SwedishAmerican Medical Foundation. For more information, contact the SwedishAmerican Medical Foundation at (815) 961-2496