The IRA charitable rollover tax incentive is set to expire at the end of 2013, so you should make plans now if you want to take advantage of it. This incentive was extended to include the 2012 and 2013 tax years as part of the last minute deal reached by Congress this past January.
The charitable rollover allows individuals aged 70 1/2 and older to donate up to $100,000 directly from their IRAs to public charities without having to include the distribution in their taxable income.
This is not just a tax incentive for the wealthy. Seniors of modest means can take advantage of this program to lower their tax bill. Here is how: Have your IRA directly make the donation that you would otherwise have made from the proceeds of your distribution. By doing this you lower your adjusted gross income which can result in less of your social security becoming taxable. Remember, the tax exempt nature of social security benefits is phased out at certain income levels. It is possible that 50% or even 85 % of your benefits could be taxable depending on your income.
There is a worksheet in IRS Publication 915 that outlines how to calculate the portion of your benefits will be taxable.
For the 2012 tax year, if 50% of your social security plus other income items exceeded $32,000 for married filing joint status and $25,000 for single, head of household or qualified widow(er) filing status, a portion of your social security would have been taxable (these were the 2012 thresholds).
As you can see, decreasing or eliminating your taxable IRA distribution will have an impact on the above calculation as it will decrease the amount of non social security income.
Using this tax benefit to lower adjusted gross income may also allow taxpayers to meet the 7.5% of income threshold required to be able to deduct medical expenses on Schedule A. Please remember that you will not be able to deduct the charitable contribution on Schedule A because you have already taken its tax benefit in the form of decreasing your taxable income.
Here is an example:
Joe and Samantha Jones are in their mid 70’s. In 2012 they had the following:
$15,000 pension income $22,000 social security income $5,000 interest income $12,000 IRA distribution
They have paid off their mortgage and only had $4,000 in medical expenses. They gave $5,000 to their church.
Scenario 1: Joe and Samantha write a $5,0000 check to their church from their checking account. Their adjusted gross income is $5,000+$12,000+$15,000+$5,500=$37,500. As you can see, $5,500 of their social security becomes taxable. Their standard deduction is $14,200 which is significantly greater the $9,000 they would have deducted if they itemized ($5,000 charitable contribution + $4,000 medical expenses). Their taxable income after their standard deduction and personal exemptions is $15,700 and total tax is $1,573.
Scenario 2: Joe and Samantha have their IRA administrator send $5,000 from their IRA directly to their church on their behalf. Their adjusted gross income now becomes $5,000+$7,000+$15,000+$3,000=$30,000. Only $7,000 of their IRA distribution and $3,000 of their social security will be taxable resulting in the decrease in adjusted gross income. Their taxable income after their standard deduction and personal exemptions is $8,200 and total tax is $823.
They saved $750 in taxes just by taking advantage of the IRA charity rollover tax incentive.
The requirements to claim the IRA charitable rollover tax incentive are:
- Age: Must be 70½ and older and required to make annual distributions from their IRAs which are then included in the taxpayers’ adjusted gross income (AGI) and subject to taxes.
- Maximum donation. A donor’s total combined charitable IRA rollover contributions cannot exceed $100,000.
- Eligible Charities. Charitable contributions from an IRA must go directly to a public charity that is not a supporting organization. Contributions to donor-advised funds and private foundations, except in narrow circumstances, do not qualify for tax-free IRA rollover contributions.
- Eligible Retirement Accounts. Distributions can only be made from traditional Individual Retirement Accounts or Roth IRAs. Charitable donations from 403(b) plans, 401(k) plans, pension plans, and other retirement plans are ineligible for the tax-free treatment.
- Directly to the Charity. Distributions must be made directly from the IRA trustee payable to the public charity.
- No Gifts in Return. Donors cannot receive any goods or services in return for charitable IRA rollover contributions in order to qualify for tax-free treatment.
- Written Receipt. In order to benefit from the tax-free treatment, donors must obtain written substantiation of each IRA rollover contribution from each recipient charity.
It is not too late to take advantage of this for this year. Please pass this information along to anyone you may know who may be able to reduce their taxes while still helping others by contributing to their favorite charity.