Charitable IRA Rollover Gifts

Editor’s note: Updated November 19, 2008.

For the first time, a charitable IRA rollover is possible. IRA owners age 70½ and older may make gifts directly from IRAs to qualified public charities. The gifts were authorized for the years 2006 and 2007, and may be as much as $100,000 each year. These gifts also qualify for the IRA owner’s required minimum distribution. This was made possible by Congress’ passage of the Pension Protection Act of 2006 (the “Pension Protection Act”) earlier this year, which President Bush signed into law.

Donors to nearly all public charities have been very interested in the charitable IRA rollover. Thousands of donors have already made gifts using this new provision. The primary reason IRA owners use the rollover to make gifts is the convenience of a direct transfer from an IRA to a favorite charity, without incurring any income tax liability for the transfer.

Some donors find that they have substantial amounts in their IRA and this is the best way for them to make a charitable gift this year. There may be other benefits as well. For IRA owners over 70½ who do not itemize, the rollover allows them to reduce their required distribution and save on current taxes. Social Security recipients have been able to reduce their income levels and save on taxes. For example, with a transfer to charity of part of their required IRA distribution, instead of 85% of Social Security being taxable, now only 50% is taxable.

There are some restrictions in the Pension Protection Act on IRA rollover gifts. The IRA gift may not be for a combined charitable and donor benefit purpose, such as a gift to purchase a table for the donor and friends at a charity auction. IRA gifts to a donor-advised fund or supporting organization are also not permitted.

Many have asked how the charitable IRA rollover (also known as a charitable IRA exclusion) will be reported on 2006 income tax returns. The Pension Protection Act provides that in 2006 and 2007, a person over the age of 70½ can donate up to $100,000 from an IRA to most types of public charities and can exclude the gift from taxable income. There is no charitable income tax deduction for the gift. The tax benefit—particularly for non-itemizers—is the ability to exclude the distribution from gross income.

The IRA custodian will report all distributions from the IRA to both the IRA owner and to the IRS. Then, the IRA owner will report all of the distributions on line 15A of Form 1040 but only the taxable distributions on line 15B. Thus, the reporting procedure for a charitable IRA rollover will be similar to that for a traditional rollover, where a person may have received a taxable distribution from a retirement account but is able to avoid taxation by rolling over the amount within 60 days to an IRA or to some other type of eligible retirement account. These charitable IRA gifts will not be disclosed in any way on Schedule A, where itemized deductions—including traditional charitable gifts—are reported.

Example: Mr. Jones, age 78, is required to withdraw $10,000 from his IRA in 2006 to avoid the 50% penalty for failure to take minimum required distributions after age 70½. He had the IRA trustee send a $5,000 check to his favorite charity, Answers in Genesis. Mr. Jones received an acknowledgment from Answers in Genesis, stating that he received no personal benefit for the gift, so the entire gift qualified for an income tax charitable deduction (this is necessary for the charitable IRA exclusion). Mr. Jones personally withdrew an additional $5,000 from the IRA. The IRA custodian will issue Form 1099-R and will report $10,000 of total distributions. Mr. Jones will report the $10,000 of total distributions on Line 15A of Form 1040, but will report only $5,000 of taxable distributions on Line 15B. The $5,000 gift will not be disclosed or reported on Schedule A, where Mr. Jones deducts the other charitable gifts that he made.

Because Answers in Genesis is a 501(c)(3) nonprofit organization and qualifies as a public charity, supporters of the ministry can use this new rule to make charitable IRA rollover gifts to the ministry. Answers in Genesis’ federal tax identification number is 33-0596423.