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IRA Charitable Rollover Bill Opens Up New Options for Giving

The Pension Protection Act of 2006 (PPA 2006) passed the House and Senate by wide margins. It is potentially the most favorable charitable legislation in many years.


The Legislation
Sen. Charles Grassley (R-IA) obtained an agreement to attach charitable legislation to PPA 2006 (H.R. 4). The long-awaited charitable legislation includes both incentives and reforms. The charitable incentives in this legislation open up powerful new options for Christian and charitable giving. These gift opportunities will be for current IRA gifts for individuals age 70 1/2 and above. Gift planners and professional advisors should be informed on these provisions for IRA owners.

Fortunately, the IRA charitable rollover will qualify for the donor's required minimum.

Current IRA Gifts

There are five general categories for current IRA rollover gifts:

• Convenience Donors who find it a very simple and easy method for an end-of-year gift.
  
  
• A standard deduction donor who gives part of an IRA Required Minimum Distribution to charity and thereby reduces income tax.
  
  
• A Social Security recipient may avoid the higher 85% tax level on Social Security.
  
  
• A major donor who may be a board member or trustee looking for a favorable opportunity to make a major gift.
  
  
• The abundantly blessed donor who wants to give above the 50% of AGI limit.

Convenience Donor

The majority of IRA owners delay taking IRA withdrawals until November or December each year. This occurs for two principal reasons. First, the longer the funds are in the IRA, the more time there is to benefit from tax-free growth. Second, many IRA owners do not need the IRA income to cover their living expenses.

As the individual approaches the end of the year, he or she will need to make decisions. If you, as an IRA owner, are actively making Christian or charitable gifts during the year, then it may be that this is a good opportunity to make a gift directly from your IRA.

Major financial services companies and charities will make it very easy to complete the gift. Convenience donors should contact their IRA custodians to arrange for the IRA charitable rollover.

There is no charitable income tax deduction on a gift directly from your IRA, but there also is no inclusion. It is simply a very convenient way to help your favorite Christian charitable organization.

Standard Deduction Donor

Many seniors do not have a mortgage and their medical deductions are less than 7.5% of adjusted gross income. Thus, 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 will be preferable for all donors taking a standard deduction to make IRA gifts directly to charity and avoid the additional income tax otherwise payable.

Income Tax on Social Security Donor

Social Security is 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 may be subject to tax.

Withdrawing an amount from an IRA will potentially cause the recipient's income to increase from the 50% taxable bracket to the 85% Social Security taxable bracket. Even though the withdrawn amount is given to charity and deducted, there still is taxation with the added 35% bracket. Thus, by making the transfer directly to charity, many Social Security recipients will save substantial taxes.

Major Donor

Board members, trustees, and other major donors frequently are asked to make gifts of $100,000 or more. As the rules have continually become more favorable for IRAs and the withdrawal schedule has been reduced, large IRAs will continue to grow. Over longer periods of time, there are occasional market dips and drops, but the longer-term trend is positive, and large IRAs will continue to increase in value.

For many professionals and business owners, the IRA may even become the vast majority of the estate. They have a need to do some "asset balancing" or there may be a major future income tax problem.

Therefore, it may be desirable for the major donor to give $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.

Generous Donor

Some very generous individuals are already giving to the 50% of adjusted gross income level. This is the maximum permissible level 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 give to 50% of adjusted gross income from their regular assets and then make "over and above" gifts from their IRA. Some generous donors may in effect give 100% or more of income per year through this method. Since the IRA is not included in taxable income, it will have no impact on their regular income and other charitable gifts.

IRS Gift Requirements

There are four requirements for a qualified IRA charitable gift.

• First, the IRA gift must otherwise have been includible ordinary income to the IRA owner.
  
  
• Second, the IRA owner must be 70 1/2 or older.
  
  
• Third, the gift must be to a qualified exempt public charity, and may not have any limitations that would disqualify a charitable deduction.
  
  
• Fourth, the recipient may not be a private foundation, supporting organization, or donor-advised fund.

Conclusion: The IRA charitable gifts provision opens up many new gift opportunities.

Thanks to Crescendo Interactive, Inc. for it work in getting this legislation passed and for much of the content of this article. Click here if you would like to sign up for the weekly Gift Legacy Newsletter.

Note: Crown Financial Ministries is not engaged in rendering legal or tax advisory services. For advice or assistance in specific cases, the services of an attorney or professional advisor should be obtained.