Question:  Having reached age 70½ and begun my minimum required IRA distributions, I question the benefits of directly transferring my IRA funds to charitable organizations rather than making charitable contributions directly as I have done in the past.

Answer:  Congress recently made permanent a tax break for IRA owners who have attained age 70½. The law allows such IRA owners to directly transfer money to charitable organizations and exclude up to $100,000 per year of such funds from taxable income.

You and many others have questioned the real benefit of this tax strategy. Distributions from IRAs are generally subject to income tax while payments to charitable organizations, within certain limitations, are deductible for taxpayers who itemize their deductions. On the surface, the tax break allowing the exclusion from income for the direct charitable payment would seem to provide no greater benefit than a taxpayer would receive by withdrawing IRA funds and making a charitable contribution with the funds received. There are, however, some meaningful benefits from direct IRA transfers to charity which include the following:

1. Itemized Deduction Limitations. The itemized deductions of taxpayers are subject to phase-out when a taxpayer’s adjusted gross income (“AGI”) exceeds certain amounts. A taxpayer who receives IRA distributions, regardless of whether the funds are contributed to charitable organizations, will report a larger amount of AGI and may face limits on itemized deductions. Furthermore, medical expenses and miscellaneous itemized deductions are deductible only to the extent they exceed certain thresholds which increase as a taxpayer’s AGI increases.

2. Tax on Social Security Benefits. Social Security benefits are taxable in part when a taxpayer’s AGI exceeds certain amounts.

3. Personal Exemption Phaseout. A taxpayer’s personal exemptions are subject to partial or complete phase-out as a taxpayer’s AGI increases.

4. No State Tax Deductions. In states such as Illinois where charitable contributions are not deductible, the receipt and inclusion in income of IRA distributions can create a larger State income tax liability.

To benefit from the allowable tax break, IRA funds must be transferred directly to one or more charitable organizations. A withdrawal of funds from an IRA followed by the payment of those funds to charity will not qualify for the income exclusion. The funds must be paid to a charitable organization for which an individual would be allowed a tax deduction for a direct contribution, other than a private foundation, a donor-advised fund, and certain other non-public charities. The income exclusion will not apply with respect to an inherited IRA which is an IRA a taxpayer receives by reason of the death of the original IRA owner who is not the donor’s spouse and which is not held in a rollover account. The $100,000 limit applies on a per person basis so spouses who are married can each take advantage of the exclusion from income.

Any taxpayer who has reached age 70½ who is otherwise making charitable contributions would be well-advised to satisfy his or her charitable wishes through direct transfers to the intended charitable organizations. While the tax break does not warrant an individual contributing more money to charity than is otherwise intended, there is an opportunity for taxpayers to benefit from charitable contributions they are otherwise making.

The Tax Corner addresses various tax, estate, asset protection and other business matters. Should you have any questions regarding the subject matter or if you have questions you want to be answered, you may contact Bruce at (312) 648-2300 or send an e-mail to bruce.bell@sfnr.com.