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Sunday November 27, 2022

Washington News

Washington Hotline

Benefit in 2022 With an IRA Charitable Rollover

Each year, IRA owners age 72 and older must take a required minimum distribution (RMD). The RMD in nearly all cases is calculated using the Uniform Table. Under the Uniform Table, distributions generally start age 72 at approximately 3.7% and increase each year. The RMD must be taken on or before December 31 of each year.

Many IRA owners with significant balances take the RMD during the last quarter of the year. Because many individuals with larger IRAs do not require IRA funds for daily living expenses, delaying an RMD until the end of the year allows for additional tax-free growth in the IRA.

Fortunately, the IRA charitable rollover will qualify to satisfy a donor's RMD. The IRS term for an IRA charitable rollover is a qualified charitable distribution (QCD). IRA custodians may also use "QCD" to refer to this transaction.

There are five donor profiles for IRA rollover gifts. The first are the convenience donors, who find it to be a very simple and easy method for an end of year gift. The second is the generous donor, who wants to give more than the 60% of AGI limit. The third profile is a major donor that may be a generous individual who is looking for a favorable opportunity to make a major gift. Fourth, a Social Security recipient may want to reduce taxes with an IRA rollover gift. Finally, a standard deduction donor can also benefit from a QCD.

Convenience Donor

Many IRA owners delay taking RMD withdrawals until October, November or December each year. As the individual approaches the end of the year, he or she will need to make decisions on charitable giving. For an IRA owner who is already giving to charity during the year, QCDs are another good opportunity for gifting.

Convenience donors may contact their IRA custodians to arrange for an IRA charitable rollover. There is no charitable income tax deduction because there is no inclusion in federal taxable income. It is simply a very convenient way to help their favorite charity.

Generous Donor

Some very generous individuals are already giving to the 60% of adjusted gross income deduction limit. This is the maximum deduction level under IRS rules to deduct cash gifts each year. Any gifts over this deduction limit may be carried forward and deducted over an additional five years. Some generous donors may also have a large IRA. Since they frequently live at a moderate level in proportion to their income and assets, they may not actually need all their IRA required minimum distribution.

If there is a desire to give more, donors can give up to 60% of adjusted gross income from their regular cash and then make an "over and above" gift from their IRA. These donors may in effect give nearly 100% of income per year through this method. Since the IRA rollover is not included in taxable income, it will have no impact on their regular income and ability to make other charitable gifts.

Major Donor

Board members, trustees and other major donors frequently have large IRAs. As the rules have continually become more favorable for IRAs and required withdrawals have been reduced, IRAs will continue to grow. Over longer periods of time, there are occasional market dips and drops, but the longer-term trend is positive and balances in IRAs will continue to increase.

For many professionals and business owners, the IRA may even become the bulk of the estate. They have a need to do some "asset balancing" to avoid future income tax problems. Therefore, it may be desirable for the major donor to give up to $100,000 per year to charity from his or her IRA. This provides the advantage of "balancing" the estate assets and reducing future RMDs from the IRA.

In addition, there may be income tax benefits. If the donor were to take the IRA distribution into his or her own personal income, the donor may be pushed into a higher marginal tax bracket or be subject to the alternative minimum tax. Thus, it may be preferable to make the gift directly from the IRA rather than making a charitable gift from regular income.

Social Security Donor

Social Security is subject to two levels of taxation. For donors who have income in excess of the first level, 50% of Social Security is taxed. For donors with income in excess of the second level, up to 85% of Social Security income may be subject to tax.

Withdrawing an amount from an IRA will potentially cause income to increase from the 50% taxable bracket to the 85% Social Security taxable bracket. Even though the withdrawn amount is given to charity and deducted, there still is increased tax on an IRA distribution to the donor. Thus, by making the transfer directly to charity, many Social Security recipients will reduce taxable income and save on taxes by using the QCD.

Standard Deduction Donor

Many seniors do not have a mortgage and their medical deductions are less than 7.5% of adjusted gross income. Thus, they use the standard deduction instead of itemizing.

If this donor withdraws $1,000 from his or her IRA and then gives it to charity, there is $1,000 of increased income with no offsetting charitable deduction because the standard deduction is taken. Therefore, it is preferable for all donors who take a standard deduction to make IRA rollover gifts directly to charity to avoid the additional taxable income.

Conclusion

An IRA charitable rollover offers many benefits to different types of donors. QCDs make it simple and easy to carry out a donors' philanthropic goals. The additional tax advantages of the IRA charitable rollovers make this a very attractive gifting opportunity for donors.

Published November 25, 2022


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