Whether you have $100, $1,000 or $100,000 to give to charity, a newly permanent charitable giving tax break can help you save taxes while helping your favorite charity. It’s called the IRA charitable rollover, and it lets you, once you reach 70 1/2, direct gifts of up to $100,000 a year from your Individual Retirement Account directly to a public operating charity.
“I’m a fan, and not because you can shelter $100,000,” says Morris Armstrong, an enrolled agent in Danbury, Conn. Why then? Because the IRA charitable rollover works for the little guy too; it lets the average person have a bit more control over the front page of their tax return—their adjusted gross income–while allowing them to support the causes they wish to support.
Armstrong has clients who satisfy annual church pledges of $1,000 and $2,000 out of their IRAs. In one case, if the donor had given the normal way—taking the IRA distribution into income and then donating it–he would have been one bracket higher. The qualified charitable distribution lowered his AGI and helped him save $500 on Medicare B premiums. “AGI matters,” says Armstrong.
If you don’t normally itemized deductions, the rollover is a clear tax win. Even if you do itemize, it can save you more tax than taking the IRA distribution into income and then donating it. By lowering your AGI, the charitable rollover may keep other income from being subject to the 3.8% net investment income tax, for example.
There’s one thing to watch out for at tax time. If you don’t tell your tax preparer that you did the distribution from your IRA to charity, there’s no way the tax preparer would know by looking at the IRS Form 1099-R that lists distributions from your IRA. “It’s easily missed unless the donor speaks up,” says Claudia Hill, an enrolled agent in Cupertino, Calif. She’s seen preparers mistakenly deduct the gift from the taxable IRA, and the donor also has it listed as a charitable donation on Schedule A. You don’t get to double dip.
Andrew Vander Ploeg, a retired securities trader in Denver who does his own tax returns, started making IRA gifts to charity the first year he was old enough, in 2011. “It’s a great way for people to give back; you can give a little bit more than you’d normally give,” he says. He skipped 2012—Congress didn’t renew the rollover provision for 2012 until January 2013, when it was renewed for 2012 and 2013. The two-year law allowed Vander Ploeg to respond to the September 2013 Colorado floods by directing a gift from his IRA to the American Red Cross. Last year, in December, when Congress made the 10-year-old on-again, off-again provision permanent, he gave $25,000 to the Food Bank of the Rockies and $25,000 to Denver-based Volunteers In Action. “Different needs come up in the community, and if I want to join in, I’ll be ready,” he says.
Permanency has big advantages for donors and charities: no scrambling at year-end and the ability to do reactive giving earlier in the year. Basically, making gifts to charity from your IRA should be on your annual checklist.
Armstrong brings up the strategy to clients at tax time, but despite the tax benefits, the charitable rollover “is a hard sell” because of paperwork. He showed one client who wrote 97 checks to 44 organizations, totaling $2,400 in donations, that she would have saved $597 had she given directly from her IRA (or $356 for the half that went to 9 of the charities). “I hope that IRA custodians develop and communicate clear policies that allow their clients to write checks,” he says.
It was the donors with IRA checkwriting flexibility who had the greatest ability to get year-end gifts to charities on time last December. (Fidelity offers IRA checkwriting, and there is no minimum gift size.) For now, if you’re a big customer, you can probably get on the phone to make the request. (Vander Ploeg made a call to his Northern Trust advisor to make the charitable distributions.)
But at many brokerages, you still have to fill out a distribution form and get a medallion signature (to prove your identity). Some mail the check to the charity; some mail it to you to forward to the charity. That sounds like a hassle, but it helps charities match up the checks and donors. “Custodians often cut checks and send them with no identifying information as to the donor or purpose,” says Kara Morin, deputy director of planned giving at Harvard University. “We have to hustle.”
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