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.
- 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}.
- 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-to–charity 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:
- 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.
- 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.)
- 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.
- 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.
- 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.
- 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.|