CHARITABLE GIFTS FROM IRAs

Supporting Conservation Through Required Minimum Distributions

Significant changes made in the federal tax code, which became effective in 2018, will potentially impact charitable giving by individuals. According to the Penn Wharton Budget Model, the total reduction of charitable giving in 2018 is estimated to be as much as $22 Billion. This estimate is based on the 2018 code eliminating the $4,050 personal exemption and increasing the standard deduction by the following:

 

  • Single taxpayers: $6,350 to $12,000 ($5,650 increase)

  • Married taxpayers who are filing separately: $6,350 to $12,000 ($5,650 increase)

  • Married taxpayers who are filing jointly: $12,700 to $24,000 ($11,300 increase)

 

Taxpayers who made charitable gifts in 2017 received a tax benefit from their gifts if, when combined with other deductible personal expenses (ex. home mortgage interest, real property taxes etc.), their total itemized deductions exceeded the standard deduction.

 

Consider this example of a married couple who files jointly:

In 2017, the couple paid $8,000 in home mortgage interest and $4,700 in real property taxes. When these deductible personal expenses are totaled, they match their standard deduction of $12,700.if they also made a $5,000 donation to TennGreen, the amount of their itemized deductions totaled $17,700, enabling them to deduct the entire $5,000 charitable gift. 

 

Now, consider this same couple filing jointly in 2018, with the standard deduction increased to $24,000. If their deductible personal expenses are the same as they were in 2017 ($12,700), a $5,000 charitable gift will still leave their deductions $6,300 short of the $24,000 standard deduction, giving them less incentive to make the gift. But, if one or both of them is at least 70 ½ years old and is a beneficiary of a taxable individual retirement account (IRA) from which they must take annual required minimum distributions (“RMDs”), there is a way for them to make the planned $5,000 charitable gift to TennGreen while at the same time reducing their taxable income.

 

For example, let’s assume the amount of the RMD is $15,000 in 2018. If that RMD is distributed directly to the beneficiary (taxpayer), they will have $15,000 of includible/taxable income.

 

However, IRS rules allow taxpayers who are 70 ½ or older to distribute up to $100,000 annually from a taxable IRA directly to a qualified charity such as TennGreen without increasing their taxable income (this must be done by way of an IRA custodian). The amount distributed to TennGreen will be counted toward satisfying the RMD, and it will not be included in the taxpayer's gross income. Thus, instead of receiving the entire $15,000 RMD from the IRA custodian as taxable income and then making the $5,000 gift to TennGreen, the taxpayer can request the custodian to distribute $5,000 directly to TennGreen and send the taxpayer the remaining $10,000 of RMD funds. This will not only satisfy the entire $15,000 RMD but also reduce their taxable income by $5,000 (their total gross income from the RMD will only be $10,000). 

 

This strategy may also qualify the taxpayer(s) for tax breaks to their adjusted gross income, help them avoid the Medicare high-income surcharge, and may reduce or eliminate taxes on Social Security benefits.

 

The same rules do not apply to distributions from a 401K Plan. However, those funds can be rolled over into a Taxable IRA and, when the rollover funds are subsequently distributed to a qualified charity by the custodian (subject to timing rules), they will be treated the same as any other IRA funds.