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Charitable IRA Rollovers

Krugliak, Wilkins, Griffiths & Dougherty Co., L.P.A.

In 2006, a law known as the Pension Protection Act allowed individuals age 70-1/2 or older to make tax-free charitable donations directly from their IRAs.  The benefit of this law was that these individuals were able to exclude the IRA distributions of up to $100,000 from their gross income which would otherwise have been a taxable distribution if that distribution was paid directly to a qualified charity.  These types of distributions to charities are referred to as Charitable IRA Rollovers.  The law was originally set to expire in 2007; however, the law was extended over the last few years, through 2014 in order to allow those taxpayers age 70-1/2 or older to make these charitable IRA rollovers.  Then, in the Protect Americans From Tax Hikes Act of 2015, this law was made permanent. 

In 2016, this law remains an active part of tax planning.  This is especially true for year-end tax planning matters for those individuals age 70-1/2 or older who have IRAs.  The way that this process works is that the individual must direct the IRA trustee to make a distribution from their IRA directly to a qualified charity.  Again, up to $100,000.00 can be excluded from the individual’s gross income in 2016.  If an individual is filing a joint return, then their spouse can also exclude an additional $100,000.00 in 2016 as well.  You are not permitted to take a charitable contribution on your 2016 return.  You are only permitted to reduce your gross income of up to $100,000.00 of a distribution from your IRA directly to a qualified charity.  These distributions do qualify for your required minimum distributions that would otherwise have to be taken from your IRA.  However, the key is that the distribution must come directly from the IRA trustee and be distributed directly to the qualified charity. 

The reason that this law is so important is that otherwise, individuals who would be receiving distributions from their IRAs would have to include that income on their income tax return, and then, if they made a subsequent gift to a charity, they may be able to take a charitable deduction if they itemized their deductions.  However, the additional tax burden created by including the IRA distribution in income may be more than the benefit that the individual taxpayer would receive from taking the charitable deduction.  In addition, if the individual does not itemize their deductions, then they would not be able to use the charitable deduction to reduce their income taxes.

Here is an example of how this Charitable IRA Rollover process would work.  Let’s assume that your required minimum distribution from your IRA for 2016 is $15,000.00.  In addition, let’s say that you’ve already taken $10,000.00 of your required minimum distribution earlier in 2016.  That means that $10,000.00 will be included in your gross income.  However, if you made a charitable contribution of $10,000.00 after you received your required minimum distribution, you may be able to take a $10,000.00 charitable contribution if you itemize your deductions.  In addition, for the remaining $5,000.00 of the required minimum distribution, if you decide to distribute that directly to a qualified charity, then you will not need to report the additional $5,000.00 in your gross income, thus saving income taxes without needing to itemize your deductions. 

Therefore, if you are charitably inclined and do not need to utilize your required minimum distributions, you should consider making a Charitable IRA Rollover to a qualified charity in order to alleviate the need to include the required minimum distribution, or part of it, in your gross income.  Please contact your financial advisor or accountant for more information on Charitable IRA Rollovers.

NOTE: This general summary of the law should not be used to solve individual problems since slight changes in the fact situation may require a material variance in the applicable legal advice.

James F. Contini II, Esq. Certified Specialist in Estate Planning, Trust & Probate Law by the OSBA Krugliak, Wilkins, Griffiths & Dougherty Co., LPA 158 North Broadway New Philadelphia, Ohio 44663 Phone:  (330) 364-3472 Fax:  (330) 602-3187 Email:  jcontini@kwgd.com

 
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