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Helpful IRA Provision for the Charitably Inclined Has Been Made Permanent

By:  Erin Blumer Bunnell, Esq.

On December 18, 2015, President Obama signed the Protecting Americans from Tax Hikes (PATH) Act of 2015, part of which reinstated and made permanent a provision of the Internal Revenue Code (the “Code”) that allows individuals who are 70½ or older to transfer up to $100,000 annually from their IRA to one or more eligible charities tax-free. This provision (known as the IRA charitable rollover provision) has been made retroactive to apply to all such qualifying distributions made on or after January 1, 2015.

Provision Requirements

This provision of the Code allows an IRA owner or the beneficiary of an IRA who is 70½ or older to exclude $100,000 of distributions from his or her IRA that would otherwise be taxable, if the distribution qualifies as a “qualified charitable distribution." In order for a distribution to qualify, the IRA trustee has to directly transfer the funds from the IRA to an eligible charity. Eligible charities would generally be organizations such as churches, educational organizations, hospitals, museums and private foundations that are operating foundations. By contrast, donor-advised funds, supporting organizations, private non-operating foundations, charitable remainder trusts and charitable lead trusts would not be considered eligible charities.

The normal rules for a federal income tax deduction for a charitable contribution must be met for the entire distribution (i.e., such individual cannot receive or expect to receive a benefit commensurate with the value of the distribution). As with the federal income tax deduction for a charitable contribution, the individual will need to acquire a written statement from the charity acknowledging there was no exchange of goods or services for the distribution. Once the distribution is excluded from the individual’s gross income as a qualified charitable distribution, such individual cannot also claim a federal income tax deduction for a charitable contribution on the donated amount.

Provision Benefits

As the charitable rollover provision allows the qualified charitable distribution amount to be excluded from the individual’s gross income, its use will not cause an individual to be subject to a higher income tax bracket. Avoiding being moved into a higher income tax bracket will also help those individuals who itemize deductions, as increased income tax brackets can cause the percentage of income limitation to reduce charitable contributions.