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Time is Short for IRA Charitable Rollover Gifts

As the clock ticks toward December 31, it still may be possible to make an IRA charitable rollover gift this year. The IRA custodian will need to process the gift prior to the December 31 deadline, so it is important to be certain the gift can be completed by then. If you have not yet taken part or all of your required minimum distribution, an IRA charitable rollover, (also called a qualified charitable distribution by the IRS) can fulfill your RMD for 2021.

There are five types of donors who benefit from IRA charitable rollover gifts. The first are the convenience donors who find it a very simple and easy method for an end of year gift. Second, a standard deduction donor benefits from a direct IRA to charity gift. Third, a Social Security recipient may reduce taxes with an IRA charitable rollover gift. Fourth, a generous donor may want to give past the total giving limit. Fifth, a major donor may be looking for a favorable way to make a large gift.
  1. Convenient Gift -- Some IRA owners delay taking IRA withdrawals until December each year. If an IRA owner is actively making gifts to charity during the year, then it may occur to him or her that this is a convenient way to make a gift. Convenience donors contact their IRA custodians to arrange for the IRA charitable rollover. There is no charitable income tax deduction, but also no inclusion in federal taxable income. It is simply a convenient way to help your favorite charity.
  2. Standard Deduction Donor -- Many seniors do not have a mortgage and their medical deductions are modest. They may not have a sufficient level of deductions to itemize and choose instead to use the standard deduction. If this donor withdraws $1,000 from his or her IRA and then gives it to charity, there is $1,000 of increased income with no offsetting charitable deduction, since the standard deduction is taken. Therefore, it is preferable for all donors taking a standard deduction to make IRA charitable rollover gifts directly to charity and avoid additional income tax.
  3. Social Security Donor -- Social Security is generally subject to two levels of taxation. For donors who have income in excess of the first level, 50% of Social Security is taxed. For donors with income in excess of the second level, up to 85% of Social Security income is taxable. A withdrawal from a traditional IRA will potentially cause the recipient's income to increase from the 50% taxable bracket to the 85% Social Security taxable bracket. Even if the withdrawn amount is given to charity and deducted, there still is the higher level of tax on Social Security. By making a transfer directly to charity, many Social Security recipients will stay in the 50% taxable group and save taxes.
  4. Generous Donor -- Some generous individuals are already giving to the maximum deduction limits for cash gifts each year. The excess gifts may be carried forward and deducted over the following five years. Some of these generous donors may also have a large IRA. Since they frequently live at a moderate level in proportion to their income and assets, they may not actually need all of their IRA. If there is a desire to give more, they can make "over and above" gifts from their IRA. Because the IRA charitable rollover is not included in taxable income, it will have no impact on their regular income and other charitable gifts.
  5. Major Donor -- Board members, trustees and other major donors may desire to make large gifts. Because the 2022 IRA required minimum withdrawals have been reduced, large IRAs will continue to grow. For many donors, the IRA may become the majority of an estate. Therefore, it may be desirable for a major donor to give up to $100,000 per year to charity from his or her IRA. This has the advantage of "balancing" the estate assets. In addition, there may be income tax benefits. If the donor were to take the IRA into his or her own personal income, there are several types of exemptions that are phased out at higher income levels. Thus, it may actually be preferable to make the gift directly from the IRA rather than making a charitable gift from regular income.

Published December 24, 2021

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