Brendan Willmann, CPA, EA, CFP®
Asheville: 828-348-8698
Cincinnati: 513-549-2736

Update on the Charitable Rollover Legislation

The charitable rollover provision has recently become permanent.  This is certainly welcome news for charitably inclined retirees.

For those who are not familiar, the charitable rollover allows those who are are 70 1/2 or older to transfer up to $100,000 directly from their IRA to a qualified charity.

An example:

A 73 year old with an IRA wishes to donate $5,000 to a qualified charity.

In the absence of the charitable rollover provision, he must take a required minimum distribution (RMD) from his IRA due to his age.  We’ll assume that amount is $5,000.  Separately, $5,000 is contributed to a charity.  (It is immaterial whether the donation comes from the $5,000 withdrawn from the IRA or from other savings.)

Let’s quickly review the tax ramifications:

1. The $5,000 distribution from the IRA is treated as taxable income.

2. The $5,000 is included as a Schedule A deduction.

But what appears simple enough – and is frequently mistaken as a perfect offset for tax purposes – is instead wrought with complication (and potentially unexpected tax liability as well).

For many, the $5,000 IRA distribution increases the tax liability due on Social Security benefits – a double whammy that makes the effective cost of a $5,000 IRA distribution far higher than simply multiplying by one’s tax rate would suggest.  In addition, many seniors no longer itemize their deductions thanks in large part to having paid off their mortgage.  As a result they claim the standard deduction instead of itemizing their deductions.  Thus the $5,000 charitable contribution doesn’t save them a nickel on their taxes.  When put together the well-intentioned donor receives an elevated tax bill and no charitable deduction.

Now consider the charitable rollover as an alternative:

Instead of withdrawing the $5,000 from the IRA, the funds are rolled or transferred directly from the IRA to the qualified charity.  The IRA owner never takes possession of the funds, an essential requirement for favorable tax treatment.

There are two primary benefits:

1. The $5,000 is NOT treated as taxable income.

2. The $5,000 rollover/transfer DOES meet the required minimum distribution (RMD) requirement.

The result?

In a single transfer our 73 year old retiree satisfies his annual required minimum distribution, avoids the income tax associated with a distribution, potentially avoids additional taxation on Social Security benefits AND directs $5,000 to the qualified charity of choice.

Of course taking a charitable deduction to boot would make this too good to be true, but the charitable rollover provision remains a meaningful tax-saving opportunity.

Per usual there are several nuances that further complicate matters so please review your strategy with a competent tax advisor in advance.



The articles presented on this blog are general in nature and should not be assumed to be applicable to your situation. In addition, tax law changes daily and the articles on this blog are not updated to reflect these changes. Anyone receiving any part of the information on this blog should not rely on or act or refrain from acting on the basis of any matter or information contained in this blog without seeking appropriate tax, legal or other professional advice. The transmission and receipt of information contained on this blog does not form or constitute a client relationship. Nothing in this blog constitutes legal advice. Opinions rendered by tax professionals are not authority.  You agree to hold Brendan Willmann, EA, forever harmless from any liability for your use or failure to use the information, advice, referrals, or suggestions provided by this blog at any time. 



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