On December 19, 2014, the President signed into law a bill that revived a number of popular tax benefits for individuals that had previously expired. One of these benefits is the so-called “IRA charitable rollover.” The legislation extends the IRA charitable rollover only until December 31, 2014, so eligible individuals who wish to take advantage of it should act quickly. The statute also applies to qualifying IRA distributions made to charities earlier in 2014.
As in prior versions of the law, the charitable rollover provision permits an individual over age 70½ to make distributions from an IRA up to an aggregate of $100,000 during the yeardirectly to qualified charities of his or her choice. Qualified charities generally do not include private foundations, donor advised funds and section 509(a)(3) supporting organizations.
These distributions receive favorable tax treatment in a number of ways. First, they are not included in the IRA owner’s gross income, but nonetheless count against the annual required minimum distribution that the IRA owner must otherwise receive after reaching age 70½.
Second, the distribution to charity does not affect the amount the donor can otherwise give to charity on a fully deductible basis. Under current law, a donor generally may make deductible cash gifts up to 50% of his or her adjusted gross income in any year to a public charity, while gifts of appreciated securities, real estate and other long term capital gain property to public charities are generally deductible up to 30% of adjusted gross income in the year of the gift. IRA distributions made directly to qualified charities via the charitable rollover are not subject to these limitations and do not affect the deductible amount of other charitable gifts a donor may choose to make. Of course, because a distribution to charity is not included in the donor’s income, the donor does not receive an additional charitable deduction for the distribution from the IRA to charity.
In addition, a qualified distribution from an IRA is not subject to the “Pease limitation” that returned as part of the 2012 fiscal cliff legislation. Under the Pease limitation, a taxpayer’s itemized deductions (including the charitable deduction) may be reduced by as much as 3% of the donor’s adjusted gross income in excess of an inflation adjusted threshold (in 2014, $254,200 for single individuals and $305,050 for married couples filing jointly). Up to 80% of otherwise allowable deductions can be lost under this limitation. Because a qualified charitable distribution from an IRA is not included in the donor’s adjusted gross income, it does not reduce the benefit of other itemized deductions.
The IRA charitable rollover is scheduled to sunset again after 2014. Although bills have been proposed to make the provision permanent since it first appeared in 2006, none have passed. Individuals who wish to take advantage of this provision should consult with their tax advisors as soon as possible.