Monday, December 20, 2010

Reduce Taxes by Using an IRA Charitable Rollover

As part of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (aka. extension of Bush Tax Cuts bill), the IRA charitable rollover has been extended through 2012. Basically, the IRA charitable rollover allows taxpayers over age 70-1/2 to contribute up to $100,000 directly from an IRA to a qualified charity. By doing a charitable rollover, taxpayers do not claim the IRA distribution as income, nor do they deduct the contribution on their tax return.

An IRA charitable rollover has the following benefits when doing charitable gift planning:
  • Distribution is not included in gross income. The IRA charitable rollover does not increase adjusted gross income. Therefore, it won't increase income above certain thresholds (eg., making Social Security payments taxable) or be included in income for state taxes.

  • Deduction not necessary. Since an IRA charitable rollover is not included in income, no charitable deduction is needed to obtain the tax benefit. Thus, taxpayers who use a standard deduction will still get a tax break from making a charitable contribution.

  • RMD can be used. An IRA charitable rollover can be made from the funds used to meet a taxpayer's RMD (required minimum distribution) requirement.
  • If I were over 70-1/2, I would make all my monetary contributions as a IRA charitable rollover for 2010 - 2012 in the following order:
  • RMD - First, I would use my RMD to make IRA charitable rollovers. Since I am required to take an RMD each year, I should use it to make any planned cash contributions.

  • Traditional IRA - Next, for charitable contributions over the RMD amount, I would take the funds out of my traditional IRA.
  • I would not make IRA charitable contributions from any Roth IRA accounts, since Roth IRA distributions are already exempt from taxes. Here are some additional details on the IRA charitable rollover.

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    This is not financial or tax advice. Please consult a professional advisor.

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