Give Back, Get a Deduction: The Charitable IRA Contribution is Now a Permanent Fixture
Category: Individual Tax Planning
Posted: June 2016
Legislation passed at the end of 2015 has cemented the charitable IRA contribution. There are numerous tax benefits to consider if the taxpayer is able to make such a contribution, though. Below are the requirements for making a “qualifying charitable distribution:”
The distribution must be from a traditional IRA or a Roth IRA . (Distributions from Roth IRAs may be taxable if the distribution is made prior to the end of the five year period of establishing the Roth.)
The distribution must be made directly from the IRA trustee to the charitable organization.
The IRA owner must be over age 70 1/2.
The contribution must be made to a qualified charitable organization (not a private foundation or a donor advised fund.)
There are several tax benefits to making a charitable IRA contribution—some obvious and some you may not have considered yet. Below are some advantages to making such a contribution:
The percentage limitation on charitable contributions can be avoided. Charitable contributions are limited to 50% of adjusted gross income. If a taxpayer received an IRA distribution of $45,000, for example, the $45,000 would be included in adjusted gross income. Supposing the taxpayer had little or no other income, a gift of the $45,000 to a charity would be limited to a $27,500 charitable deduction. The remaining $27,500 is available for carryforward to future years, but the taxpayer pays tax on the carryforward amount in the year of the gift. If the IRA distribution goes directly to the charity, it is not included on the taxpayer’s return as income, and he effectively gets a $45,000 charitable deduction.
Itemized deduction and personal exemption phase outs can be avoided. Making a direct charitable IRA distribution removes the income from the taxpayer’s adjusted gross income. Phase outs are calculated on AGI, so lowering income will help to avoid potential triggering of the limitations.
Using the standard deduction. A taxpayer who normally has insufficient deductions to itemize can receive the benefit of the standard deduction, and also realize the benefit of the charitable contribution because it is not included in income.
Other percentage limitations are also affected. The medical expense deduction and the miscellaneous itemized deduction are both limited to amounts that exceed a percentage of adjusted gross income (7.5% for medical for taxpayers 65 and over, and 2% for miscellaneous.) By keeping the IRA distribution out of income, these limits are not increased.
It is less likely that Social Security will be taxable. Social Security is taxed based on a modification of adjusted gross income. Taking the IRA distribution and then giving it to charity would increase this base amount, and subject more of the Social Security benefit to taxation.
State income taxes may be affected by the Charitable IRA distribution. In Michigan, there is a limit on the amount of retirement benefits that can be deducted from taxable income. That amount, for taxpayers born before 1946, was $99,623 on a joint return and $49,811 on a single return. Designating the IRA distribution directly to a qualified charity would remove the amount of the charitable distribution from the computation.
The charitable IRA distribution can satisfy all or part of the required minimum distribution for the account holder.
The $100,000 limit applies to each taxpayer, so a married couple could designate up to $200,000 as a charitable IRA distribution.
For more answers to your questions about making a charitable IRA contribution, contact a representative from Mierendorf at 6167844445.