Charles and Jane Reaves are preparing their tax return for 2015. Charles is 72 years old and Jane will be 70 ½ on April 30, 2016. Both Charles and Jane have traditional IRAs. Charles also has a 401(k) plan. They have heard about a law that allows them to make charitable gifts tax-free. Charles made a gift of $25,000.00 to the YMCA out of his 401(k) during 2015. He intends to make an identical gift to the “Y” in 2016. Jane made a charitable gift of $25,000.00 to Planned Parenthood out of her IRA during 2015. She plans to make a gift of $125,000.00 to their church in 2016.
Charitable Deductions from IRA for Those 70 ½ or Over Are Tax-Free
Now that it is time to prepare and file tax returns for 2015, it is a good time for seniors to consider making contributions to charities of their choice in 2016 in order to secure tax deductions. A new law, the “Protecting Americans From Tax Hikes Act of 2015” (PATH), contains a provision that allows donors who are 70 ½ or older to make distributions to qualified charities from their traditional Individual Retirement Accounts (IRAs).
New Law Makes IRA Charitable Rollovers Permanent
The 2015 act makes permanent a previous enactment called the Pension Protection Act of 2006. This act has been referred to often as IRA Charitable Rollover. It was supposed to have expired on December 31, 2007. However, Congress has extended the law, each time it was to expire, most recently through December 31, 2914. Prior to the passing of PATH, this provision had never been made permanent. This left taxpayers in limbo in the year of expiration as to whether or not a charitable distribution from an IRA would qualify as a tax exemption.
Charitable IRA Rollovers Count Toward RMD But Not Toward AGI
Additionally, a charitable deduction will count toward the required minimum distribution (RMD), which those over the age of 70 ½ are required to make each year. At the same time, the gift will not count toward the adjusted gross income.
Qualifying Deductions Limited in Amount, Timing and Type of Retirement Account
PATH allows annual tax-free distributions to a charity from an IRA up to $100,000.00. That $100,000.00 does not have to be given to a single charity. As long as the charity is a qualified charity, the donor may divide the total amount between any number of charities he or she desires.
The ability to make tax-free contributions cannot be made out of other types of retirement accounts but only from the traditional IRA. That means that a person who has a 401(k) retirement account will need to transfer assets to an IRA in order to take advantage of the IRA Charitable Rollover provision.
A further limitation of the law is the requirement that the individual making the charitable gift be 70 ½ on the day that the transfer is made. In other words, the transfer cannot be made during the portion of the year before the individual turns 70 ½.
No Charitable Deduction Allowed with Qualified IRA Rollover Contribution
The IRA Charitable Rollover is of most benefit to those who take a standard deduction rather than itemizing their deductions. The taxpayer can’t double dip by making the tax-free gift and taking an itemized deduction. The advantage to the IRA rollover donation comes with having the amount given not being counted in the gross income.
Too Late for 2015 But Not Too Late for 2016
PATH was passed on December 18, 2015. To meet the deadline for qualification as a tax exempt contribution, the charity had to receive the gift by December 31, 2015. This made it difficult, if not impossible, for most people to take a deduction for this past year. Obviously, it is too late now to take advantage of the new law for 2015 taxes if a charitable deduction was not made before December 31, 2015. However, it is a great time to plan for charitable contributions which will qualify for 2016.
If an individual sends a check of a charitable gift from an IRA, it is recommended that a donor write a note reminding the charity that it must cash the check prior to the December 31, 2016, deadline. If the check is not deposited on time, the amount will not be withdrawn from the IRA in time to qualify. Although this shouldn’t be a problem if the gift is made early enough, unfortunately, many do not begin to give consideration to charitable gift fiving until late in the year.
Since IRA administrators, such as Fidelity, Vanguard, and Schwab, each have different procedures for making the deadline, it is best to check well in advance of the deadline to determine the paperwork and timing required.
Can Charles and Jane Take Advantage of the New Law?
Charles’ 2015 charitable gift to “the Y” does not qualify under the law because it was made from his 401(k). He could have qualified if he had transferred the money to his IRA first and then made the gift from that fund. Jane’s 2015 gift to Planned Parenthood does not qualify because she made the transfer before she was 70 ½.
Charles can qualify the 2016 gift of $25,000.00 he plans to make to “the Y” if he makes it from his IRA. He can make additional contributions, if he so desires, to any number of other charities and these will also qualify, as long as he does not go over the $100,000.00 limit.
If Jane follows through with her plan to give $125,000.00 to the church, she can qualify $100,000.00 of it for tax-free status if she makes that portion of the gift from her IRA and she waits until after October 30, 2016, to make the distribution.
- Sandra W. Reed is an attorney with Katten & Benson, an Elder Law firm, whose principal office is in Fort Worth, Texas. She lives and practices in Somervell County. If you have questions or concerns, please contact her by email at firstname.lastname@example.org or by phone at 254.797.0211.