IRA retirement saving golden egg on cashBy Duke Eide

It is possible under some circumstances to roll money from your IRA to a charity.  Under legislation enacted in 2006, taxpayers aged 70 ½ or older may direct a qualified charitable distribution (QCD) to a qualified charity from an IRA without income recognition.  The income exclusion for a QCD may not exceed $100,000 for any tax year (and for married individuals filing a joint return, it is $100,000 per individual so you can do up to $200,000).  A QCD must be made directly by the IRA trustee to the charitable organization.

IRA-to-charity provision made permanent.

  1. In the December 2015 PATH Act, the IRA- to-charity provision was reinstated retroactively for charitable transfers during 2015, and made a permanent provision in the tax law [Sec. 408(d), as amended by 2015 PATH Act Sec. 11(a)DivQ}.
  2. As a result, taxpayers who have attained age 70 ½ may exclude from gross income up to $100,000 of qualified charitable distributions from IRAs to charity, both for 2015 and each year thereafter.

This means tax savings for you.

Because an IRA-tocharity transfer is in lieu of required minimum distribution (RMD) income, this strategy reduces the taxpayer’s AGI.  There are numerous phase-outs and phase-ins based on the taxpayer’s AGI as well as other circumstances where the IRA-to-charity transfer produce tax savings:

    1. Standard deduction filers: many retirees no longer itemize deductions and do not receive a benefit from their charitable contributions. For 2016, the standard deduction for those over 65 is $13,850 for joint filers ($15,100 if both spouses are over 65) and $7,850  for a single filer.
    2. Itemized and exemption phase-outs. Savings may also occur from reducing the phase-out of itemized deductions and the phase-out of personal exemptions.  These phase-outs occur for 2016 as joint AGI exceeds $311,300 or single AGI exceeds $259.400.  However if the taxpayer is in AMT, that computation does not allow personal exemptions and removes the itemized deduction phase-out (i.e., taxpayers in AMT will not benefit from a reduction in AGI that minimizes the phase-out of itemized deductions or personal exemptions.)
    3. 8% NIIT. Retirees who incur the net investment tax (NIIT) will save from the IRA-to-charity strategy where the amount of NII subject to tax is limited by the amount of AGI over the single threshold of $200,000 of AGI or joint threshold of $250,000 of AGI.
    4. Phase-in of taxable Social Security. Some of the greatest tax savings may occur from the phase-in of taxability of social security benefits, applicable to lower income retirees.  The two-tiered 50% and 85% phase-in of taxable social security benefits occurs as AGI (plus tax-exempt interest plus 50% of taxable social security benefits) exceeds $25,000 for single filers or $32,000 for joint filers.
    5. Other AGI- sensitive limits. A reduction in AGI may allow additional medical expenses (7.5% threshold in 2016; 10% in 2017 and after), additional miscellaneous itemized deductions (2% threshold), or a reduction in the phase-out of the $25,000 rental loss allowance for modified AGI of $100,000-$150,000.
    6. Taxpayers with large charitable contributions that exceed the 50%-of-AGI limit will benefit by a direct transfer from an IRA that reduces AGI. IRA-to-charity transfers are not subject to the percentage-of-AGI limitations [IRS Notice 2007-7 Q & A39].

The following table illustrates the tax savings that occur in specific situations from the IRA-to-charity transfer strategy:

Taxpayer Situation AGI before QCD IRA-to-Charity Tax Savings % Explanation
High income: No 3.8% NIIT but in AMT; deduction phase-outs (itemized & ex.) $350,000 $30,000 -0- 0% AMT reverses phase-out of itemized and exemptions
High income: No 3.8% NIIT and no AMT deduction phase-outs $350,000 $30,000 $938 3% Savings from reduced phase-out of itemized deductions and exemptions
High income: 3.8% NIIT and in AMT; deduction phase-outs $350,000 $30,000 $1,140 4% Saves 3.8% NIIT due to AGI reduction*
High income: 3.8% NIIT; no AMT; deduction phase-outs $350,000 $30,000 $2,078 7% Saves 3.8% NIIT* and 3% from reduced phase-outs
Middle income: Rental Loss phase-out $120,000 $10,000 $1,250 13% $4,250 decrease in taxable Soc. Sec. (85% phase-in) x 15% rate
Lower income: Taxable Soc. Sec. (gross $40K); std. ded.; joint $68,850 $5,000 $637 13% $4,250 decrease in taxable Soc. Cec. (85% phase-in) x 15% rate
Lower income: Taxable Soc. Sec. (gross $30K); std. ded.; single $68,850 $5,000 $1,387 28% Taxable income drops $9,250 ($5,000 less RMD and $4,250 less taxable Soc. Sec.)
Lower income: Taxable Soc. Sec. (gross $30K); std. ded.; single $53,100 $5,000 $1,742 35% Taxable income drops $9,250 ($5,000 less RMD and $4,250 less taxable Soc. Sec.)
*Savings in 3.8% NIIT assumes the lesser amount subject to the tax is excess AGI above $200,000/$250,000 threshold rather than actual NII.

Questions?  Contact Duke Eide, Shareholder at deide@sweeneyconrad.com or 425.629.1990.