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Know the Twists and Turns Involving Charitable IRA Rollovers

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Jan 14th 2015
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Late last year, Congress threw a lifeline to certain retirees who wanted to give IRA assets to charity. As part of the Tax Increase Prevention Act (TIPA), it extended a tax break for direct transfers from IRAs to qualified charitable organizations, retroactive to January 1, 2014. This extension expired again on December 31, 2014, but for those who got in under the wire, the IRS has spelled out the rules for such “charitable rollovers” in a new release (IR-2014-117, 12/23/14).

Under this tax law provision, announced by the IRS, a taxpayer age 70 1/2  or older can choose to transfer funds directly from an IRA to a qualified charity. The annual limit on rollovers is $100,000 per taxpayer ($200,000 for a married couple). Although no tax deduction is permitted, donors aren't taxed on the distribution, either. Note that the distribution must be made directly from the IRA trustee to the charitable organization. In other words, the taxpayer can't use the funds and then have the cash transferred to the charity.

Furthermore, the contribution must otherwise qualify as a tax-deductible charitable donation. For instance, if the deductible amount would be would have been disallowed due to inadequate substantiation or if would have been decreased because the donor received a taxable benefit in return, the tax exclusion doesn't apply to any part of the IRA distribution.

Be aware that a rollover may be made from a Roth IRA if a portion of the distribution would be taxable (e.g., distributions from a Roth in existence less than five years). However, it generally makes sense to exhaust the funds in a traditional IRA first. Subsequent distributions from a Roth may be tax-free of their own accord.

Extra tax benefit: Once your clients reach age 70 1/2, they must begin taking "required minimum distributions" (RMDs) from their IRAs, taxable at ordinary income rates. Failing to take an RMD generally results in a penalty equal to 50 percent of the amount that should have been withdrawn. But the amount rolled over from an IRA to charity counts as an RMD. Therefore, your clients can meet this requirement without paying tax at the same time they are contributing to a worthy cause.

In addition, a client may benefit from this technique if charitable deductions would be limited by certain other tax law provisions. Finally, the tax-free rollover may effectively reduce the tax that a retiree must pay on Social Security  benefits and lower a client's AGI for various other tax purposes.

The tax law provision for charitable rollovers has expired and been extended several times in the past. There’s a good chance it will be revived again, but there are no guarantees. Clients should generally be advised to adopt a wait-and-see approach for 2015.

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