Tax Payers Benefit from Recent Charitable IRS Distribution Legislation

By David K. Smucker, CPA, April 21, 2016,

Charitable IRA Distributions: A Great Opportunity

Recent legislation making the $100,000 charitable IRA contribution permanent allows taxpayers to take full advantage of the numerous tax benefits of these contributions.

Sec. 408(d)(8) permits “qualifying charitable distributions” from traditional IRA or Roth IRA accounts to be excluded from gross income. The provision first appeared in the Pension Protection Act, P.L. 109-280, in August 2006, as a temporary measure. In the intervening years it lapsed and was revived several times. The Protecting Americans From Tax Hikes (PATH) Act of 2015, P.L. 114-113, made it permanent. It is a powerful incentive to charitable giving, and through the use of life insurance, the ultimate amount the charity receives can be substantially increased.

What is a “qualifying charitable distribution”?

  • The requirements are relatively simple. The charitable distribution must be:
  • From a traditional IRA or a Roth IRA;
  • Direct from the IRA trustee to the charitable organization—with no intervening possession or ownership by the IRA owner;
  • On or after the IRA owner has reached age 70½; and
  • A contribution to an organization that would qualify as a charitable organization under Sec. 170(b(1)(a), other than a private foundation or donor advised fund.

Tax benefits of charitable IRA distributions

Charitable IRA distributions come with several tax benefits, some not readily apparent, that this article explores in part.

Avoiding the percentage limitation on charitable contributions: This is perhaps the most significant tax benefit of making a charitable IRA distribution instead of a direct contribution to a charity. Under the standard IRA distribution rules, if a donor takes $100,000 out of an IRA and gives it to a charity, the $100,000 first has to be included in gross income. Then the donor gets a charitable contribution itemized deduction. The possible problem is that the donor’s $100,000 contribution deduction will run into the 50%-of-adjusted-gross-income (AGI) limitation under Sec. 170(b)(1).

As a result, it is possible that the donor will not be able to deduct the full $100,000 in the year of contribution. That will force the donor to pay income tax on the difference between the $100,000 and the deductible amount. Carryover provisions allow the excess contributions to be carried forward for five years. But still the donor would have to pay more income tax (possibly a lot) than would otherwise be the case and take his or her chances of having enough taxable income to be able to recover the excess contribution in future years.

A Sec. 408(d)(8) charitable IRA distribution completely avoids that issue. By excluding the $100,000 from gross income, in effect the donor gets a $100,000 charitable contribution deduction—since the $100,000 isn’t included in income, it is, effectively, deducted.

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Davis & Hodgdon Associates CPAs is a full-service public accounting firm with offices in Williston and Rutland Vermont. The firm is a member of Vermont Businesses for Social Responsibility (VBSR), Vermont Business Environmental Partnership (VBEP), Lake Champlain Regional Chamber of Commerce (LCRCC), Vermont Chamber of Commerce, and Women Business Owners Network (WBON).  The firm serves its clients by providing progressive, proactive services through expert staff, sophisticated technology, and unparalleled efficiency. For more information please call 802.878.1963 (Williston) or 802.775.7132 (Rutland) or email [email protected]

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