They’re Back: Charitable IRA Contributions Not Taxable
Category: Financial and taxes in retirement
December 28, 2015 — You only have a few days left to do it, but you can now once again make a qualified charitable donation from your IRA in 2015, and not have that donation count as taxable income. The re-authorization of The IRA Charitable Rollover provision is one of many outcomes of the Congress’s recent Omnibus spending bill (PATH Act of 2015). The provision allows individuals who have reached age 70½ to donate up to $100,000 to charitable organizations directly from their Individual Retirement Account (IRA). The change is permanently reinstated. The payment must be made directly to the charity from the IRA or 401k.
The problem with this good news is that most people have probably already taken their 2015 Required Minimum Distributions (RMDs), so they are out of luck for 2015. However if you haven’t yet made yours, you have a few days left in 2015 to take advantage. And going forward in future years, you can donate up to $100,000 to qualified charitable organizations.
You can find the text of Section 408 9d)(8) here:
“So much of the aggregate amount of qualified charitable distributions with respect to a taxpayer made during any taxable year which does not exceed $100,000 shall not be includible in gross income of such taxpayer for such taxable year.”
Finance Committee Chairman Orrin Hatch (R-Utah) highlighted that the change…
“would, for example, make sure that charitable distributions from IRAs remain tax-free on a permanent basis.”
For further reading:
Time is Running Out for Taking Your RMD
Comments on "They’re Back: Charitable IRA Contributions Not Taxable"
Louise says:
Can someone give examples on how this works? This is my take on what I read.
Let's say you have to take out $10,000 RMD and the federal tax is 15% (just a figure I pulled out of my hat). The tax would be $1,500. Typically in this scenario Uncle Sam would take my $1,500 and I would be left with $8,500. In this new law I could donate that $1,500 to a charity of my choice and still walk away with $8,500?
Also, would I be able to deduct that $1,500 on my Income tax as a charitable deduction?
ella says:
Hi Louise,
This is something i have been doing on my husband's traditional IRA for the past few years, so i have a good handle on it. First, only the amount you give is free of taxes. Whatever you don't give is taxed at your usual rate. Because this goes on the first page of your 1040, it comes out before your adjusted gross income affecting many areas positively (in your favor), such as itemized deductions (if you itemize) and several possible credits (such as saving credit) It also reduces your State income tax as your AGI has now been reduced.
I would like to mention that this money would have to be deposited into the charitable institution's account in by December 31, 2015 for the credit to take place for 2015. That gives most people very little time for 2015 income tax filing. I've "gambled" for the past few years and won, hoping Congress would pass the law (and they have); giving to good causes in advance.
As for the 15% rate you mention above, i find that with the addition of Medicare and Social Security taxes by the Federal gov't and State taxes added in, i usually have more like 33% taken out than the 15% you'd expect being in the 15% tax bracket. Tax people - please correct me on this if i'm representing it incorrectly. I could say more but don't want to confuse. If you have any questions, please feel free to ask. When i first did this, i called the IRA and they were very helpful!
ella says:
What i meant to say above is that the savings on income that isn't taxed is greater than the 15% one would expect in the 15% tax bracket. Thus, giving out of one's IRA to a charity produces a higher tax saving than one might ordinary expect.
elaine says:
The government doesn't always give us timely information. However, if you are going to give that amount to the charity anyway...it may be worth the risk the government will do this...sort of like Thanksgiving...although far less certain.
IF on the other hand, you will adjust the amount of charitable giving for a particular year, keep monitoring...most knowledge folks that I know, were comfortable with deduction back in October. I am always a worrier and less tuned into the government tax climate.
ella had a nice explanation!
ella says:
Following up on your comment, elaine, one year we gave and the gov't did not pass the law until January of the new year. Go figure!!!
raman says:
With reference to Louise's example: I would think all of $10,000 will be donated to a charity directly from the IRA trustee. You will not be taxed on $10,000, and you do not get $8,500. Uncle Sam will not get $1,500. However, you should be able to take $10,000 as itemized deductions. Assuming a tax rate of 15%, your tax burden will be reduced by $1,500. Anyone has comments?