Making Charitable Gifts from your IRA

November 7, 2017

The tax law was changed in 2015 to permanently allow tax free Charitable Gifts from an Individual Retirement Account (“IRA”) by those over age 70-1/2. The law allows an “exclusion from income” of up to $100,000 per person, per year, for distributions made directly to charities by taxpayers over age 70-1/2. This change ended the uncertainty confronting tax payers for many years caused by Congress failing to enact “tax extender” legislation until very late in the year.

Basic Requirements

A direct charitable contribution from your IRA is deemed to be part of your Required Minimum Distribution (“RMD”). You can contribute more than your RMD to charity up to $100,000 in any calendar year. The gift can satisfy a pledge that you have made. You cannot receive anything of value in exchange for your contribution. The charity must give you a receipt stating the amount of the charitable distribution and that no goods, services, or benefits of any kind were or will be provided to you in consideration for the distribution from the IRA. The contribution cannot go to a donor-advised fund, supporting organization or private foundation. Finally, you cannot make a qualifying charitable IRA distribution from a Simplified Employee Plan (“SEP”) or a Savings Incentive Match Plans for Employees (“SIMPLE” plan) if the employer contributed to such plan during the year of the proposed gift.

Gifts of Appreciated Long-term Capital Gain Property

You may wish to forego a direct IRA charitable contribution if you could save even more tax on your charitable contribution by making a gift of appreciated assets subject to long-term capital gains. If you are in a high federal income tax bracket, and have a zero, or low, basis in stock or other highly appreciated assets that you would otherwise sell, you can save the applicable federal capital gains tax on the long-term capital gain by gifting the appreciated asset directly to the charity. This is in addition to the benefit of the income tax deduction for full fair market value of the charitable contribution.

Benefits of IRA Charitable Contribution

There are several Federal income tax benefits to the IRA charitable contribution compared to other charitable gifts. However, these Federal income tax benefits are generally much smaller than the tax benefits of gifting highly appreciated long-term capital gains property that would otherwise be sold during your lifetime. Deductions for charitable contributions are limited to 50% of Adjusted Gross Income (“AGI”) each year. The excess deduction can be carried forward five years. For taxpayers who contribute at this level, the IRA charitable contribution offers an opportunity to make a contribution that is not limited by AGI.

A charitable gift made directly from your IRA to charity has the additional benefit of not increasing your AGI and not being subject to the cutback on itemized deductions.

Making charitable gifts from your IRA can be a confusing and legally challenging process. Please call us if you would like to discuss your IRA charitable gifting options.