The charitable IRA rollover legislation allows you to transfer lifetime gifts up to $100,000 using funds from your individual retirement account (IRA) without undesirable tax effects. This opportunity is only available through Dec. 31, 2011.
IRA funds are heavily taxed whenever you draw them out, at rates as high as 35%. What’s more, the tax burden never goes away – even your heirs will pay income tax on IRA funds they receive from your estate, and federal estate taxes may apply, as well. You can increase your usual gift to qualified organizations by the amount of tax that otherwise would have come due on your required distribution. For example, let's assume that you normally give your home church a check for $5,000 every year. Instead of writing a check, you could instruct your IRA trustee to send them $5,000 directly from your IRA account. If you had withdrawn the $5,000 from your IRA, assuming you are in a 25% tax bracket, you will be subject to $1,250 in taxes. In other words, your $5,000 withdrawal become a $3,750 donation and you would have to send a letter to the pastor telling them that the government kept the other $1,250 you intended to donate. However, if you send the funds directly from your IRA, your retirement funds would have more impact as 100% of the funds would go towards the benefits of the church programs – and you will have increased your support by one-third, paid for by the IRS.
Important: IRA gifts, under this special tax law, must be made by the trustee or custodian of your IRA. The funds cannot go to you and you deliver them to your local church or qualified organization.
You may contribute funds this way if:
* You are age 70½ or older at the time of the gift.
* The gifts total any amount up to $100,000 in 2011.
* You transfer funds directly from an IRA.
* You transfer the gifts outright to one or more qualified charities, but not to supporting organizations, or for gift annuities, charitable trusts, donor advised funds or any gift from which you receive a personal benefit.
Who benefits from the IRA Rollover?
• Donors who do not depend on their required minimum distributions for income and are interested in making a highly tax-advantaged gift of significance.
• Taxpayers who don’t itemize their deductions. The IRA rollover most benefits the nearly two-thirds of Americans who do not itemize deductions on their annual income tax returns and therefore do not receive a tax benefit for their charitable contributions. Non-itemizers include lower- and middle-income taxpayers, as well as an estimated 5.2 million higher-income individuals.
• Itemizing taxpayers who’ve reached the charitable giving limit. Donors who itemize their taxes are prohibited from deducting more than 50% of their AGI for the purpose of making charitable donations. However, donations from an IRA are excluded from the percentage limit, allowing individuals who have reached the 50% threshold to give more.
• Taxpayers whose tax deductions decrease as their income increases. Several federal tax deductions – dependent and personal exemption deductions and deductions for medical expenses and non-business casualty losses, for instance – become smaller as a taxpayer’s income increases. By making charitable donations from an IRA, rather than making regular, required distributions that qualify as income, taxpayers keep their annual income down and qualify for other tax deductions.
• Qualified charities that are depending on significant gifts this year more than ever to help support the ongoing and growing needs in our both locally and globally.
What are the requirements to take advantage of the IRA Rollover?
• Age Requirement. You must be 70½ years old or older when the distribution is made. The legislation is very clear that you must be 70½ at the date you make the gift.
• Donation Limit. Your total combined charitable IRA rollover contributions cannot exceed $100,000 in any one year. Charitable contributions from an IRA totaling more than $100,000 will not be eligible for tax-free treatment and will be counted as part of your annual gross income.
• Eligible Charities. Any charitable contributions you make from an IRA must go directly to a public charity. Contributions to supporting organizations, donor-advised funds, and private foundations, except in narrow circumstances, do not qualify for the tax-free treatment.
Important: Before making an IRA rollover contribution, contact the recipient charity to confirm that it is eligible to receive tax-free gifts from IRAs. The charity’s determination letter from the IRS will indicate whether it is a qualified charity, exempt under Sections 501(c) and 509(a)(1), 509(a)(2), or 509(a)(4) of the Internal Revenue Code; or, if it is an ineligible supporting organization, exempt under Section 509(a)(1)(3).
• Eligible Retirement Accounts. Distributions can only be made from traditional Individual Retirement Accounts or Roth IRAs. Charitable donations from 403(b) plans, 401(k) plans, pension plans, and other retirement plans are ineligible for the tax-free treatment. You can give your required distribution to a qualified charitable organization without having to count it in your taxable income.
• Directly to the Charity. Distributions must be made directly from the IRA trustee payable to the public charity.
• No Gifts in Return. You cannot receive any goods or services in return for charitable IRA rollover contributions in order to qualify for tax-free treatment. Ineligible benefits include auctions, raffle tickets, fundraising dinners, or any other type of quid-pro-quo transactions.
• Written Receipt. In order to benefit from the tax-free treatment, you must obtain written substantiation of each IRA rollover contribution from each recipient charity.
• Qualification Towards Your Minimum Distribution Requirement. If you have not yet taken your required minimum distribution, the charitable IRA rollover gift can satisfy all or part of that requirement. Contact your IRA custodian to complete the gift.
• Multiple Organizations. Under the law, you can give a maximum of $100,000. For example, you can give to two organizations $50,000 each this year or any other combination that totals $100,000 or less. Any amount of more than $100,000 in one year must be reported as taxable income.
• Combined Efforts of Spouses. If you have a spouse (as defined by the IRS) who is 70½ or older and has an IRA, he or she can also give up to $100,000 from his or her IRA.
Before making IRA rollovers, consult with your tax advisors about how you can benefit from this opportunity.
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