Twists and Turns to Charitable Rollovers

Special tax break for older taxpayers

If you are “of a certain age,” you may benefit from a unique tax break. Under a special tax law provision, an individual age 70½ or older can transfer a significant amount of funds directly from an IRA to a qualified charitable organization without paying any tax on the distribution. This “charitable rollover” counts as a required minimum distribution (RMD) for tax purposes.

This provision, which had expired and has been reinstated several times, was extended again by the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act). What’s more, the PATH Act made it permanent.

Background: Previously, you could not transfer funds tax-free directly from an IRA to a charitable organization. Instead, you were required to pay tax on the distribution, regardless of your charitable intentions. This arrangement also worked against retirees who wanted to use IRA funds for charitable donations but no longer itemized their deductions.

However, beginning with the Pension Protection Act of 2006 (PPA) and subsequent legislation—including the PATH Act—individuals who are age 70½ or older can transfer IRA funds directly to charity, up to an annual limit of $100,000 ($200,000 for a married couple). Although no tax deduction is allowed, donors are not taxed on the distribution either.

For these purposes, a qualified distribution is defined as one from either a traditional or Roth IRA that would otherwise be taxable. The distribution must be made directly from the IRA trustee to the charity.

Furthermore, the contribution must otherwise qualify as a charitable donation. If the deductible amount decreases because of a benefit received in return—for a dinner at a fundraising event, for example—or the deduction would not be allowed due to inadequate substantiation, the exclusion is not available for any part of the IRA distribution.

Finally, an IRA participant is generally required to begin receiving RMDs in the year after the year in which he or she turns age 70½. A qualified charitable rollover counts as a distribution toward the requirement.

Note that the same rules also apply to Roth IRAs. Roth IRA distributions to individuals age 59½ years or older are often tax-free. But a portion of a distribution may be taxable for a Roth in existence less than five years. If you have both a traditional IRA and a Roth IRA, it generally makes sense to use the traditional IRA first for charitable distributions.

Be aware that the charitable rollover technique is not for everyone. If you are interested, obtain professional guidance as to how it might benefit your family’s situation.

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