IRA Charitable Rollover

The IRA charitable rollover allows taxpayers to make tax-free charitable gifts directly from their Individual Retirement Accounts to eligible charities, including colleges, universities and independent schools.

Currently, the provision:

  • Caps qualified charitable IRA distributions at $100,000 per person per year,
  • Precludes the funding of gift annuities and similar life income plans and
  • Applies only to donors age 70½ or older.

The provision was permanently extended on Dec. 18, 2015.

 

Important note: The following overview of the IRA rollover provision is designed to provide advancement professionals with a general understanding of the law and should not be construed as legal, accounting, tax or other professional advice.

Overview of IRA Charitable Rollover

  • The donor requests his or her IRA plan administrator to transfer funds to a charitable organization. (Donor-advised funds, supporting organizations and private foundations, are not included under the provisions. See note below.)
  • The IRA administrator transfers funds directly to the charity.
  • This "qualified charitable distribution" is excluded from the donor's adjusted gross income.
  • Qualified charitable distributions are excluded from the donor's adjusted gross income. Note: IRAs may be funded with pre- or post-tax dollars, and assets distributed from IRAs may, accordingly, be taxable or nontaxable. Only IRA distributions that would be included as taxable income if withdrawn by the account holder count as "qualified charitable distributions" and can be excluded from income. If donors choose to distribute nontaxable IRA funds to a charity, they may still be able to claim a charitable tax deduction for the amount of the gift. Prospective donors should consult with tax advisers before making any charitable distributions from IRAs.
  • IRA account holders over age 70½ are subject to required distribution rules. Qualified charitable distributions from IRA accounts count toward the owner's required minimum distributions.
  • "Qualified charitable distributions" (i.e., charitable rollovers of funds which can be excluded from a donor's income) are not included as part of the donor's maximum allowable charitable tax deductions. This means that IRA rollover gifts do not count toward 50 percent of their adjusted gross income limitation on charitable gifts of cash.
  • Required IRA distributions may increase an individual's adjusted gross income and increase the percentage of Social Security payments on which he or she has to pay tax. By choosing to make a charitable distribution with all or part of their required IRA distribution, donors may reduce income and reduce the percentage of Social Security subject to taxation.
  • The IRA rollover allows donors who do not itemize deductions to contribute IRA assets to charities and enjoy tax benefits similar to those derived from claiming itemized charitable deductions.
  • Taxpayers in states that do not allow itemized deductions and follow federal income inclusion rules may realize state tax benefits by making charitable qualified distributions from their IRAs.
  • Qualified charitable distributions cannot be paid to account holders. Distribution checks must be payable directly to the charity to be excluded from donor income.
  • IRA rollovers cannot be used to fund split interest or life income gifts such as charitable gift annuities.
  • Donors may not receive quid pro quo benefits. If the donor receives any benefits that would typically reduce his or her charitable deduction, no portion of the IRA distribution may be excluded from income.
  • IRA rollovers to private foundations, donor-advised funds and supporting organizations (defined in IRC section 509(a)(3)) are explicitly excluded from the new tax benefits. While college and university foundations may consider themselves "private" or be included as "supporting organizations" on institution financial statements, most college and university foundations are technically public charities (509(a)(1)) and qualify as recipients of qualified charitable distributions.
  • As noted above, IRA accounts may be funded with both pre- and post-tax dollars and withdrawals may be taxable or nontaxable. Distributions of nontaxable assets do not count as "qualified charitable distributions" and donors cannot exclude such gift amounts from income. Donors may, of course, contribute such assets and claim a regular charitable deduction.
  • Gifts to institutions made through an IRA rollover should be included in figures reported to the Voluntary Support of Education Survey.
  • Charities should encourage donors to consult with their tax and financial advisers before making distributions and to inform charities about intended gifts.
Legislative and Regulatory Issues on the IRA Charitable Rollover

Taxpayers who want to make charitable contributions of traditional IRA assets can suffer negative tax consequences. If IRA funds are transferred directly to a public charity, the donor has to report the IRA gift as ordinary income, taxable at regular rates. Donors can offset the increase in taxable income in part by claiming charitable deductions. This, however, poses several problems for would-be donors:

  • Taxpayers can claim only charitable deductions equal to 50 percent of their income in a given year,
  • The value of possible itemized deductions can be further reduced by limits on itemized deductions for higher-income taxpayers and
  • Increases in federal adjusted gross income can increase state tax liabilities and in some cases cause more of their Social Security income to be taxed.

Now, as a result of the Tax Cuts and Jobs Act of 2017, only approximately 11 percent of American taxpayers will itemize their tax returns.

The IRA charitable rollover allows eligible donors to exclude up to $100,000 per year in IRA gifts from their ordinary taxable income, removing these negative tax consequences. An expansion such as this would allow middle-income seniors who are no longer itemizers to avoid the negative tax consequences and make tax-free gifts to charities, including colleges, universities and independent schools.

CASE Position

CASE supports the expansion of the IRA charitable rollover.

As such, CASE supports the Legacy IRA Act of 2019 (S. 1257/H.R. 3832 ). This legislation would expand the IRA Charitable Rollover to seniors beginning at age 65, allowing them to make charitable donations with tax-free IRA rollovers through life-income plans such as charitable gift annuity or charitable remainder trust.

CASE is working with other organizations in the charitable sector to build support for expansion of the IRA Charitable Rollover. 

Resources

 

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